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Why Automate your Savings?

  • It Reduces the Likelihood of Human Error: Life is crazy and sometimes we forget to do the good things that we intend to do. If we don’t automate our savings, we run the risk that we will forget to save.
  • It Removes Temptation: When you pay yourself first, you take the money you need for savings and bills and place this “out of sight, out of mind.” This makes it much easier to resist temptation when you’re faced with an enticing purchase. If the money were available in your account, you could potentially talk yourself into spending it. But you can’t spend what you don’t have. Placing it out of sight reminds you it’s been allocated for other things.
  • It Forces You to Be More Frugal: When savings becomes a priority, we find a way to spend less on other budget categories to make savings happen.  By automating your savings, it forces you to live within your remaining income. 
    • This reminds me of Parkinson’s Law, which is the old adage that work expands to fill the time allotted. Put simply, the amount of work required adjusts to the time available for its completion. In financial terms, spending expands to fill the income received. If you make $50k a year then you will spend $50k a year. Same thing for $75k and $100k. 
    • We’ve all had moments where we consider “robbing Peter to pay Paul.” Then our water heater breaks, and we use the money we’d meant to put into retirement savings to replace it, figuring we’ll make up the difference at some point later on. But we never do because something else comes up. When you automate your savings, you’re left with only a certain amount of money to get you through the month’s other expenses. When an unexpected expense comes up, you’re forced to get creative about paying for it —either you can delay the purchase, find a cheaper way of obtaining it or slash another spending area, like eating out for the rest of the month, to pay for it. 
  • Save more over time: Most people save what’s left after all the bills have been paid. When viewed as a necessity rather than a luxury, savings will be prioritized before any less important budgetary category. The wise steward gives to the church first, then saves. Only then does he spend on the rest of his budget.  This disciplined habit will result in saving more over time because you do not leave the decision to save up for debate each month. You have already decided. Savings will happen routinely and systematically.  
  • Get out of debt faster: This may sound counter intuitive. How can I get out of debt faster by saving? The reality is that we need to have reserves (emergency fund) in order to get out of debt and stay out of debt. 
    • Dave Ramsey jokingly calls savings Murphy Insurance. It seems that all the negative forces in the world conspire together to keep you from becoming debt free. This is when Murphy’s Law shows up. Murphy’s Law states that if something bad can happen, it will happen. For some reason, this tend to happen often to those trying to dig out of debt.  The car breaks down, water heater breaks, or the roof leaks. We need some Murphy Insurance in the form of a savings fund to keep us from going deeper into debt and slowing the process down.  

 

How to Automate your Savings

There are two major categories of savings, short term and long term. Let’s first look at short term.

Short Term Savings

  • There are two buckets which we need to address, Emergency Fund and Annual Expense Fund.  
    • Emergency Fund – we’ve already addressed this in a previous episode. For more information check out episode (NUMBER). As a reminder, we should shoot for 3-6 month of living expenses as an emergency fund.  For those working on getting out of debt, check out our Debt Elimination episode (NUMBER) for more details as your goal initially is $1,000. Set up an automatic transfer at your bank from your checking account to a savings account each month. By making it automatic you won’t miss a payment. If you need $6,000 more in savings, find ways to reduce spending or increase income for a short period of time while you reach your goal. 
    • Annual Expense Fund – Again, this has been addressed in detail in episode (NUMBER). Add up all your irregular bills (taxes, insurance, vacation, christmas, planned expenses). Divide the sum by 12 and set up an automatic bank transfer to your savings account each month so that the money is available when the bill comes due. This is an important stress saving habit that we should all create this year.  

Long Term Savings

  • Work Sponsored retirement plans, such as a 401(k), 403(b), TSP, Simple IRA, and others, are a great way to build retirement savings.  Many of these plans offer an employer match to the amount you contribute up to a certain percentage. Here at LFG, we have a 401(k) where the company will match dollar for dollar up to 3% of the employees income and 50 cents on the dollar up to 5%. In other words, if our employees contribute 5% of their pay to the 401(k) we’ll match 4%. 
    • If you have an employer who matches your retirement savings, take full advantage of that match. If you don’t have an employer sponsored retirement plan, then we encourage you to consider setting up and/or funding your own Individual Retirement Account.
    • Talk with your employee benefits team/person to set up the retirement account and to change/increase your contributions. Also consider using a Roth option if available. 
  • Individual Retirement Plans, such as a Traditional IRA or Roth IRA, would be the next accounts to setup/fund if you dont have an employer sponsored retirement plan or if your plan does not offer a match. 
    • Details
      • Must have earned income to contribute
      • Max contribution is $6,000 or $7,000 for those 50 and older.
      • Traditional IRAs may not be contributed to once age 72 is reached. 
    •  Set up Systematic Savings Plan – It depends on the institution at which you establish your account.  
      • If at a bank, you may be able to talk with branch personnel to establish or change a monthly saving plan. 
        • Dont use a savings account or Bank CD for LONG TERM savings as the cost of living (inflation) is likely going to exceed the interest earned. (Losing money “safely”)
      • If at an investment firm where you have a financial representative/advisor, you can work directly with them to establish the monthly Bank ACH to fund your retirement account. 

 

Tips for increasing your savings

  1. Don’t Just Cut Your Spending—Boost Your Savings
  2. Making More Money? Save More, Too
  3. Manage Windfalls Wisely
  4. Get Help, you don’t know what you don’t know. 
  5. Take Prudent Risk

 


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The topics discussed in this podcast are for general information only and are not intended to provide specific investment advice or recommendations.  Investing and investment strategies involve risk including the potential loss of principal. Past performance is not a guarantee of future results.

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