If you want to build your savings, setting up automatic transfers is a good place to start. You won’t have to worry about when or how much to transfer each month, and removing those barriers can be crucial if you’d otherwise wind up stuck in analysis paralysis.
While automated apps and solutions can help you save, too much automation may leave you with an unfounded sense of accomplishment. Before you set it and forget it, it’s best to figure out how much you need to save and plan to periodically check in to make sure the automated systems you put in place will get the job done.
Automating daily, weekly, or monthly transfers can save you time and mental energy. But you should carefully think through the initial steps of determining why and how much you want to save.
For example, if your goal is to build an emergency fund, you’ll want to start by determining your necessary monthly expenses (this emergency fund calculator can help you add up the results). Multiply those expenses by 3 to 12 depending on how long you want your emergency fund to last. Generally, the higher your income the longer it will take to find new work with an equivalent pay. Then, you can set up an automatic transfer to slowly build your emergency fund.
Other goals, such as paying off debt and saving for retirement, can be more complex. When paying off debt, you should make a strategic decision about which debts to focus on. Some people prefer to pay down the lowest balance debts first, while others want to focus on debts with the highest interest rates.
For retirement, you can start by setting a goal for how much of your income you want to save and invest. Perhaps your goal is to save 15% of your income, but you start at 5% or 10% with a plan to slowly increase your contribution rate over time.
Automated apps and services can take several forms. Some banking products have automation features built-in and allow you to easily set up regular transfers from your checking to your savings account. There are also saving and investing apps that can analyze your bank account and make transfers after determining you'll have excess money after paying your bills.
Once you have a goal and plan in place, you can use these automation tools to ensure you're making progress. For instance, if your goal is to build your retirement account, you can set up automatic contributions to your 401(k) or automatic transfers to an individual retirement account (IRA).
Jumping from contributing nothing to 15% of your income can be difficult. But you could set up a calendar reminder to slightly increase your contribution amount every 6 or 12 months.
Putting aspects of your saving and investing on autopilot can be beneficial in several ways:
- Remove a pain point: Transferring money into your savings when you know there are ways you could spend it today can be difficult. Automation relieves you of the mental burden of manually initiating each transfer.
- Save time: Setting up automated savings will also save you time in the future, but make sure to plan before setting everything on autopilot.
- Make budgeting easier: By automating your savings, you’re putting one of the core principles of budgeting and long-term wealth-building — pay yourself first — into action. Your savings get set aside automatically, and then you budget the rest for your other needs and wants.
- Build good habits: Saving and investing doesn't come naturally to many people, but creating a plan and using automation can make saving part of your everyday life.
Make sure you start with a thoughtful plan and reevaluate as you go. Here are a few ways you can make sure you don’t let automation inadvertently lead you off track:
- Check-in (at least) quarterly: If you keep a budget, you may have a close eye on your money throughout the month. If not, make sure to check in at least quarterly to see if the automated transfers and contributions still align with your goals.
- Increase contributions when you can: Many financial goals, including building an emergency fund, can take a long time to achieve. Starting slow and getting in the habit of saving is important. See if you can increase your contribution amount a little each time you check-in on your finances. You likely won't notice an extra 1% or 2% missing from your spending money, but it can make a big difference in building your savings over time.
- Reassess and adjust to changes: Your goals and finances can shift following major events. Set aside time to rethink your plan after a job loss, promotion, birth, marriage, or other significant change.
No matter how much you start with, saving money can be an important part of building a solid financial future. With your goals in mind and a plan in place, you can use automation to take some of the day-to-day work out of the process. And stay flexible if your goals or situation shifts. You already have the basic structure in place, now you can quickly update your processes to stay on track.