Setting up an automatic savings plan takes the guesswork out of saving each month. With an automatic savings plan, you handle the initial setup, and it's hands-off the rest of the way. If you're ready to amplify your savings efforts, then it may be time to learn how to establish an automated plan for saving and why it's a useful tool for managing your money.
A savings account can be a great place to keep your emergency fund, as it's liquid and easily accessible. If you save in a high-yield savings account, you can earn a competitive annual percentage yield in the bargain. Savings accounts are also useful when saving for short- or long-term goals, such as a vacation or down payment on a home.
The challenge, however, may lie in making new additions to your savings. You may have the best intentions to save each month, but something—an unexpected expense or a smaller than an anticipated paycheck—makes saving difficult.
This unexpected shortfall isn’t an uncommon problem, and it's something many people struggle with as well. But there is something you can do to break the cycle and grow your savings.
How an Automatic Savings Plan Works
An automatic savings plan is quite simple. You schedule a recurring deposit from your checking account into a linked savings account. How often the deposit occurs depends largely on how often you're paid and your personal preferences. For example, if you're paid biweekly on Fridays, you could schedule an automatic deposit from checking to savings the following Tuesday. That gives your paycheck enough time to clear.
Or, if you're paid once per month, you could arrange for a savings deposit to occur automatically along the same timeline. The timing isn't necessarily what's important with an automatic savings plan; it's the consistency of it that counts.
Making automatic deposits into a savings account relieves the need to think about it. In essence, money is deposited before you have time to worry about expenses or how much money will be leftover. And when savings are automatic, there's less likelihood that you'll spend it on unnecessary purchases. In fact, once automatic savings deposits become a habit, you may find you don't miss the money at all. You'll be glad of that if an emergency happens and you need to tap into your extra funds.
Modern technology makes it very easy to set up an automatic savings plan. It's often easiest to open a savings account at a bank where you have a checking account and link the two. But, you could also link out to a savings account at another bank. And you're not limited to just savings accounts. You can set up a recurring automatic deposit into an individual retirement account (IRA) or a certificate of deposit (CD) account if the CD allows for additional monthly deposits.
If you currently have direct deposit through your employer, the simplest and most effective way to establish your automatic savings program is to have part of your paycheck directly deposited into your savings account. It doesn’t matter if it is $10 or $500—simply setting this up will automatically ensure you save money every single time you are paid, and the rest, as usual, will flow to your checking account to cover monthly bills and needs.
How to Make the Most of Your Automatic Savings Plan
Creating an automatic savings plan is a step in the right direction financially. But it's important to make sure you're utilizing it fully. You can do that by:
- Regularly review your budget to determine if you have additional money for savings.
- Set clear goals for your automatic savings—both for the short- and long-term
- Utilize high-yield savings account to earn the best APY on the money you're setting aside.
- Choose a savings account with minimal fees, so you get to hold on to all the interest you're earning.
- Withdraw from your savings only when it is truly necessary.
In April 2020, the Federal Reserve eliminated the cap of six withdrawals a month from savings accounts under Federal Regulation D. But making excessive withdrawals from savings is counter-intuitive to the purpose of having an automatic savings plan.