Why automating your savings works

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You may have noticed that almost all financial advisers and financial experts have more or less the same advice for building wealth and saving more money faster: automate your savings. While this money-saving trick isn’t new, it really works – and that’s thanks to the psychology.

When it comes to managing your personal finances, automation is more common than you might think. We see it at work when a percentage of our paychecks are automatically deposited into our employer sponsored 401 (k) accounts. Some of our pre-tax money is taken from our paycheck and invested for retirement, with no need to manually transfer money to the account.

But if we were to make the effort to decide how much of each paycheck should go to our 401 (k) for each payroll cycle and then make the transfer, how many people would continually contribute and how many would save more irregularly?

Currently, only half of Americans participate in a workplace pension plan. And automation plays such a big role in saving money that, according to MarketWatch, Congress wants to propose legislation that would require companies to automatically enroll their employees in a retirement savings plan and ensure that 3 % of their paychecks go to the account by default.

So why is automating your savings so game-changing when it comes to your money?

Automation helps us avoid current biases

As humans, we tend to have a need for immediate satisfaction. When faced with a decision – like splurging on a sale or investing money – we are biased towards ourselves, so we are likely to make the choice that will be most beneficial to us at that time. . This thought process is called the present bias.

The further into the future the alternative option is, the less important it seems. This can become a barrier when it comes to saving for major future purchases, like buying a house or paying for a wedding. And that’s one of the main reasons saving for retirement can be so difficult.

However, we can overcome the current bias by removing the option to choose between saving and spending. This is where the automation of your savings comes in.

When we are automatically enrolled in a 401 (k) plan at work and start contributing 3% (or more) of each paycheck, we don’t have the option to choose between putting the 3% for retirement or using the 3% for something else because we never see the money in our checking account.

Chances are, you are probably thinking about some things you’d rather spend that money on right now. Automation ensures that we are making pension contributions that will increase without even thinking about it.

So when financial experts advise clients to automate their savings and investments to build wealth, it’s because the strategy actually works, psychologically.

How to make automation part of your financial plan

There are several ways to automate your savings.

If you are using direct deposit for your paycheck, you can update it to split your paycheck between a checking account and a savings account. That way some of your paychecks go straight to your savings account and whatever is in your checking account is a fair game for your spending.

Another easy way is to set up automatic deposits from your checking account to your savings account. Set deposits to occur on the same day of each month (such as the day after your paycheck arrives in the account). This way, you will regularly save a fixed amount of money without even giving yourself the chance to use it for anything else.

Where to save money

Ally Bank Online Savings Account

  • Annual percentage return (APY)

  • The minimum balance

  • Monthly fee

    No monthly maintenance fees

  • Maximum number of transactions

    Up to 6 free withdrawals or transfers per statement cycle * The withdrawal limit of 6 survey cycles is removed during the coronavirus outbreak under Regulation D

  • Excessive transaction fees

  • Overdraft fees

  • Offer a checking account?

  • Offer an ATM card?

    Yes, if you have an Ally checking account

Marcus High Yield Online Savings by Goldman Sachs

Information about Marcus High Yield Online Savings by Goldman Sachs was independently collected by CNBC and was not reviewed or provided by the bank prior to publication. Goldman Sachs Bank USA is a member of the FDIC.

  • Annual percentage return (APY)

  • The minimum balance

    None to open; $ 1 to earn interest

  • Monthly fee

  • Maximum number of transactions

    Up to 6 free withdrawals or transfers per statement cycle * The withdrawal limit of 6 survey cycles is removed during the coronavirus outbreak under Regulation D

  • Excessive transaction fees

  • Overdraft fees

  • Offer a checking account?

  • Offer an ATM card?

At the end of the line

While it’s okay to splurge or buy something that you really want in the moment, be sure to take steps to save money before making spending decisions. Automating your savings isn’t necessarily new advice, but it works because it helps you overcome current prejudices. This way you avoid all the situations where you have to choose between saving money and buying something you want.

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.

About Christian M.

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