The Beauty of Automating Savings
Why do people have a hard time-saving money? One simple answer is that savings get treated as an afterthought.
What most people do when they earn money is pay everyone else first. They pay the landlord, the cell phone company, the internet provider, the credit card company, the government, and on and on and think money will be left over to pay themselves after. The reality is if you build this habit of paying everyone else first, then you never pay yourself.
The best way for changing this habit is to put paying yourself first on auto pilot. If you are saving for retirement, make sure the money goes into your tax-advantaged account up front (whether this is a 401k/403b or a type of IRA). If you are saving for your child’s college, automatically put money into their 529 accounts systematically. If you are saving to buy a home or car or any medium-term goals, then send money automatically to your high yield savings account (these pay higher interest than your typical bank savings rate of .01%). The key is to do this before any of the money touches your checking account where bills and living expenses are paid from.
This concept has done wonders for the retirement savings of Americans with the success of automatically moving money from paychecks and into 401ks/403bs before it goes to a bank account. This has helped to create $406,000 401(k) millionaires in America as of the first quarter of 2022, per a marketwatch.com & Fidelity review. Americans even continued to save through the market volatility we have seen this year. One of the many reasons it is successful is because it takes the manual/emotional part of the process out of it. Since it is automatic, people don’t have to think about it, and it helps to drive successful outcomes over time.
Taking this approach with all of your financial goals will set you up for greater success. Now, how do you get motivated to save for your goals? According to a financial psychologist experiment in 2021, it starts with visualizing your goals. Write it down and think about it, create a vision board of the top things you want your money to do for you. It will help to shift your spending and savings habits. The numbers cited by the CNBC experiment were that people who did this boosted their savings by more than 70%. That is a big number.
Take the step to automate your savings for the goals you want to achieve by paying yourself first, and you’ll be surprised how quickly they can be hit.
Thanks for checking out the blog.
Navarone Simpson, CFP®