In an automatic savings plan a fixed amount of money automatically gets deposited into a person’s account at specific intervals. It is a kind of personal savings system which ensures that a certain amount of money gets deposited into your savings account with every paycheck, be it on a monthly, bi-monthly, weekly or daily basis.
Steps to automate your savings
- Decide how much to save: First you will have to earmark an amount that you want to save every week or two weeks or month. No amount is too big or too small when it comes to savings. You can decide to save 5% of your paycheck, or 20% or 50%. This decision depends on your savings goals. Saving around 15-20% of your paycheck is usually adequate in the long term.
- Open a savings account: After deciding on the amount that you want to save, you need to open a savings account that will give you tax advantage. These tax-advantaged accounts will benefit in the long-run when the amount accumulated in the accounts becomes large. The savings account can be individual or joint, depending on whether you want anybody else to have access to that account. Make sure that this is not the account from where you make withdrawals for your daily expenses.
- Set dates for automatic savings: After opening the savings account, you need to set a day on which a specific amount will automatically get transferred from you paycheck to your savings account. If you receive you paycheck on a fixed day every month, then you can set your automatic savings date as the next day. You can even decide on the amount and frequency of the transfers. For example, you might not want to transfer the entire amount that you want to save on one day. In such situations you can distribute the amount into multiple transfers carried out over a week or a month.
- Check your savings account regularly: Check your savings account regularly to match your balances. The amount saved plus your monthly expenses should add up to the amount that you received in your paycheck. Additionally, by checking your savings account regularly you feel encouraged to save more as you see your money growing.
Benefits of automating your savings
By automating your savings, you prioritise your savings contributions by paying yourself first. The amount gets transferred to your savings account before you can use the money for any other expenses like rent, car loan, household or electricity.
The best part is that you can automate your savings for any purpose – retirement, buying a house, emergency fund or further studies. Over a long period of time, the small deposits accumulate into a huge amount and even earn compound interest.
Points to remember
- Try not to withdraw from the account until it is for the purpose for which you have been saving in it.
- Look for a bank which allows you to change the amount you want to save in the account. This will help you in saving more when you receive a pay hike or a bonus.
- Choose a monthly savings amount that you are comfortable with. Do not get carried away and set unrealistic goals as it get difficult to implement.
- It will be a few months before you get used to the idea of the savings account. Until then hold tight and be strong willed about not withdrawing from that account.