Automating Finances – Finding What Works Best For You
Have you ever wondered how to merge savings into your budget? What if there was a way to save efficiently without putting you in a panic about having enough money on hand to pay monthly expenses or for discretionary spending? Think about your spending habits for a second. Most of the time, we don’t even think twice about swiping a card or dishing out cash for smaller purchases and monthly expenses. If you live in an apartment, you pay rent. You might also have a car payment, utilities, or a mortgage. But what if you could also see savings as one of your monthly expenses? You’d probably thank yourself 10 years down the road.
The most important step in automating savings is tracking your monthly expenses. If your monthly expenses do not fluctuate much, then adding automated savings to your budget will be simple. But without some degree of predictability, the amount available for savings may be more fluid. Once you know your expenses, you are able to figure, with some confidence, the amount of surplus you will have for the month. Many people view the surplus as simply extra money that they can spend. However, from a financial standpoint, saving as much as you can of the surplus, especially at younger ages, will put you in a strong financial position in the future.
For years, companies have done this on behalf of their employees in 401(k) plans. The plans that offer automatic enrollment have the ability to electronically take a percentage of your earned income and put it towards your retirement. We can choose the desired percentage, but after that, we really don’t even look at the amount that is deposited into the plan. The goal is to mimic that with our own income in conjunction with our budgets, monthly expense, and ultimately, savings.
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Automating monthly credit card payments can be beneficial because it lowers the chance that a payment could be missed. You are not even required to go online and pay it. Automating bill pay for rent, utilities, car payment, etc. can cut time and stress in addressing fixed monthly expenses. Automating savings works the same way.
Let’s focus on establishing savings and how to divide it. First, establish an emergency fund to the equivalent of 3-6 months’ worth of expenses. An easy way to do this is by opening a high-interest savings account and setting up an automatic recurring transfer on any given day of the month for say, $250. This can be done early in a month during the first pay period if you are paid bi-weekly, or during the second pay period of the month. Make regular savings a priority. What you are doing is automating the savings as if it were a monthly expense – making it more habitual and putting less thought into it. If you don’t see money that you might be susceptible to spending, you won’t hesitate to save it. The same holds true for investing. If your emergency fund is healthy and you have added cash laying around outside, automating monthly transfers from cash accounts into investment accounts allows for more growth.
If you also have specific goals such as buying a car in two years, you could create a savings account beyond that of an emergency fund. Then transfer an amount to that account each month to be allocated towards the goal you’re saving for. It depends on how you feel comfortable separating the funds. Either open another savings account separate from your emergency fund or have both held in one savings account, leaving you to be in charge of knowing what is allocated to emergency and savings goal.
If your income varies monthly, you can still set up an automatic savings plan with minimal amounts by giving yourself a task to review quarterly to make necessary adjustments. The key is creating a healthy money habit by making “Pay Yourself First” a line item on your monthly budget to make savings and investing less stressful. It may take a few months to get used to this habit, but with some practice, it will bring you peace of mind and will put savings at the forefront of your financial focus.
