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How to Automate Savings

January 22, 2021 · 7 minute read

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How to Automate Savings

Humans are funny creatures. Just because a person knows something is good for them, there’s no guarantee they’ll actually do it. That’s why learning how to automate savings can help turn good advice—“Save money”—into good habits.

It seems obvious that putting money away to spend later is a wise tactic. Whether it’s pulling together an emergency fund to cover an unexpected financial need, stowing away cash for a splurge like a vacation, or working toward long-term financial goals, saving is a sound endeavor.

And yet many Americans put very little money away. Though the personal saving rate was up dramatically during the pandemic, for years it hovered around 7%. This means that, on average, Americans have been putting away roughly 7 cents of every dollar of income earned.

How Much Do Americans Save?

Whether because of lower earnings, debt, simply not being in the habit of saving, or some other reason, many Americans have trouble putting money away on a regular basis.

How much are people actually saving? The average U.S. household had less than $9,000 in the bank (not counting retirement funds or investments) in the 2016 Federal Reserve household survey, though there were significant differences based on factors like age and familial status.

For the under 34 demographic, childless couples had the greatest average savings, $4,700, while single parents had the lowest, $1,350. Couples with children and childless singles fell somewhere in the middle, with about $3,700 and $2,700 in the bank, respectively.

Not surprisingly, savings tend to increase during an individual’s working years, up to age 65.

But because these numbers are averages, they don’t tell a complete story. Those with more money in the bank may inflate the average numbers, making it difficult to illustrate just how hard saving money may be for others. In fact, if faced with an unexpected $400 expense, 4 in 10 adults wouldn’t have the money to cover it, according to a Federal Reserve report.

And everyone is aware of how the costs of the roof overhead have risen. Households that spend 30% or more of income on housing (monthly gross on rent or mortgage and related costs) are considered housing cost-burdened. Of about 40.7 million renter households with positive incomes that paid cash rent in 2018, nearly 50% were housing cost-burdened, the Census Bureau reported.

Why Automating Savings Makes Sense

When people say one thing and then do another, it’s called the value-action gap or intentional-behavior gap. Psychologists have lots of theories about why this disconnect exists.

When it comes to saving money, lots of things can get in the way: routine bills, an unexpected big night out with friends, a shopping splurge, or simply forgetting to move money into savings.

But by taking some of the human element out of saving money and using an automatic savings app, it may be possible to overcome some of the obstacles that make it hard for people to save.

Setting up automated savings takes the thought out of saving money, so that instead of having to overcome temptation and make the responsible choice again and again, some of the decision-making around doing so is reduced or eliminated.

Automating savings also reduces the amount of time an individual has to spend each month on tasks like paying bills and other aspects of routine financial management. Furthermore, by eliminating barriers to saving and reducing the pain of putting away money routinely, learning how to automate savings may even help some people achieve their financial goals faster than leaving it all to be done manually each month. After all, procrastination and instant gratification can be powerful forces to overcome—and for some people, they can often stand in the way of growing savings.

How to automate savings? Simply decide which actions to automate and set them up with a lender (if it offers automated services). Then adding a portion of each paycheck to a savings account or bill-paying happens automatically. (That said, it’s advisable to monitor accounts with automated transactions set up to ensure there are sufficient funds and everything goes as planned.)

Here are some ways to get started.

Setting Up Direct Deposit

A good first step to automating savings is setting up direct deposit for paychecks. This means that on payday, your paycheck goes directly into the bank account.

Arranging for direct deposit into an account that’s connected to other automatic banking actions such as bill payments, or funding a dedicated savings account or investment fund, ensures a regular, ongoing flow of money to cover the other automated transactions.

Funneling Off Money for Savings

“Out of sight, out of mind.” When it comes to growing one’s money, whether in a dedicated savings or investment account or some combination, that old saying can be particularly relevant—and effective.

When money doesn’t show up on your everyday banking balance, you might forget it’s there—thereby reducing the temptation to spend. That’s why setting up a dedicated savings account—or accounts that are earmarked for various purposes and goals—can be a smart savings tactic.

Even if the money isn’t burning a hole in your pocket, you may simply forget to move money over to savings regularly. But once you’ve set up a dedicated account, you can improve the odds of following through on savings goals by setting up automatic contributions.

For example, if the goal is to save 10% of every paycheck, you could calculate what that works out to and set up an automatic transfer to occur each and every payday. This way, the funds are saved with no extra effort at all.

Earmarking Money for Each Goal

There are a lot of things people can choose to do with their money—and accordingly, most people have more than one savings goal. But if all their money is in a single savings account, it can be difficult to determine how effectively they are tracking for each individual goal. Keeping just one account for all savings can introduce needless bookkeeping complexities and even fees, if monthly transactions exceed the number the bank allows for free.

Whether it’s funding an emergency money reserve, saving for vacation, or growing a down payment for a house, there is financial clarity to be gained by setting up separate savings accounts for each goal and then making regular automated deposits into each.

How much should go into each savings account? That depends on a person’s goals and the priority and immediacy of each. But once they’ve determined what makes sense, they can simply set up automatic transfers to the appropriate accounts on a schedule that makes sense for the individual.

Choosing a High-Interest Account

Saving can be hard work. But without the right savings account, those hard-earned dollars may not go as far as they potentially could. Instead of saving money in just any account, look for a high-interest account to increase the returns of your automated savings.

There are lots of ways lenders may reward automatic savers, helping them to reach their goals faster. For example, a recurring automated deposit of $100 may earn interest at a lower starting rate, but increasing that deposit to $500 each month may trigger a higher rate.

Taking Advantage of Employer Programs

For those who have savings for retirement among their financial goals, employers can be a great savings partner. Those with a 401(k) may want to arrange automatic paycheck deductions, so the contribution comes out of the employee’s pay before it even lands in their bank account.

Some companies will also match 401(k) contributions up to a certain level each year. That’s an easy way to increase retirement savings.

Paying Bills Automatically

The late fees associated with missing a bill payment needlessly take a bite out of savings. So for people trying to save money, ensuring that all payments go out on time is an easy way to reduce losses that can derail a savings plan.

You don’t need a great memory to stay on top of rent, car, and utility payments, and other bills—this too can be done automatically. Simply identify which bills can be automated (it makes sense to automate predictable billings that don’t fluctuate each month), set them up in the payment system, and rest assured they’ll be paid by the due date as long as adequate funds are available.

For credit card bills, it’s good to ensure that spending habits don’t exceed the amount flowing into the account from paychecks and other sources. Even if everything is automated, if you make a big purchase one month, it’s wise to check in advance of the payment date that there are sufficient funds to cover the automatic payment.

Setting up a calendar reminder each month several days before the credit card payment date is a good reminder to make sure there’s enough money to cover the amount owed, particularly if your credit card spending habits are irregular.

Monitoring Financial Insights

Setting—and sticking to—a budget is an important part of successful financial management. But it can be a lot of work to monitor spending in each category, and to stay on the right side of all targets.

Instead of crunching the numbers week after week and month after month, automated reporting can improve the ease of fulfilling this important, but arguably boring, mathematical task.

To take the pain out of ongoing budget and financial monitoring, you may want to take advantage of automated dashboards that update regularly to provide a real-time snapshot of spending.

Pay attention to account balances and itemized spending category breakdowns. This can provide a clearer picture on where money is actually going, as well as reveal potential opportunities to cut back.

Some banks also allow account holders to set up personal financial goals—such as monthly savings targets—and then automatically track their transactions against these objectives.

Increasing Deposits Over Time

While learning how to automate savings can take the headache out of managing finances, it’s wise to revisit the amounts periodically. Cash flows change from time to time, and there may be new opportunities to save.

For example, you may get a raise or pay off a car loan, or your lifestyle habits may change—and this could free up more money for savings.

Even if nothing of note has changed, some individuals may find that they have more room to contribute to savings than they estimated at the outset. Even increasing automated savings by 1% per paycheck can help savings grow faster.

Setting a periodic automatic calendar reminder to closely review finances may help to identify opportunities to increase savings. When it’s time to do so, delete old recurring transfers and set up new ongoing automated deposits at the new desired amount.

An Account to Round Up

Automatically funneling part of your paycheck into a cash management account like SoFi Money® makes sense if you like cash-back rewards and goal-based savings, which SoFi calls vaults.

SoFi Money® account holders are eligible for cash back on local restaurants and businesses and limited-time offers (past offers included Warby Parker and Nike).

There are no account fees—keeping more money in your account.

The Roundups feature helps you save automatically, every time you spend using your SoFi debit card. Each transaction is rounded up to the nearest dollar, and the change is automatically transferred from your spending balance to the vault of your choice.

Find out how to build an emergency fund with SoFi Money®.



SoFi Money®
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