Saving money: It’s a very good thing, but — like eating fewer French fries and getting enough sleep — can be hard advice to put into practice. That’s why learning how to automate savings can be so helpful. It takes the ongoing need for focus and financial discipline off your plate and offers a convenient way to put your money to work for you.
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 (like the down payment for a house), 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, to 10%, as of June 2022, it plummeted to about 5%. This means that, on average, Americans have been putting away roughly 5 cents of every dollar of income earned. While any saving is better than no saving at all, that is still a low figure that can put financial goals out of reach.
Automating your savings can help change that. It’s a process that can help you save regularly, so your cash grows. Read on to learn:
• Why automating savings is a good idea
• How to automate savings in a variety of ways.
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 technique, 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 you have to spend each month on tasks like paying bills and other aspects of routine cash management. Furthermore, it eliminates barriers to saving and reduces the pain of putting away money routinely, which may even help you hit your financial goals faster than doing everything manually each month. After all, procrastination and instant gratification can be powerful forces to overcome — and they can often stand in the way of growing savings.
9 Ways to Automate Savings
How to automate savings? Simply decide which actions to automate and set them up with a lender (if they offer automated services).
Here are some good ways to get started.
1. 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. People often plunk their full paycheck into their checking account, but a smart move can be to send some of those funds into a savings vehicle.
Whether you fund a dedicated savings account or investment fund, this process will ensure a regular, ongoing flow of money to help you build a nest egg. If your employer doesn’t have a way for you to divide your automatic deposit, there’s a simple workaround: Have your paycheck go into your checking account and then have a sum automatically transferred to savings on the next day.
2. 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, from accumulating cash for a vacation, a new car, or the down payment on a home.
If all of your money goes into a single savings account, it can be difficult to determine how effectively they are tracking for each individual goal. What’s more, 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 a honeymoon, or growing a down payment for a house, you’ll gain financial clarity 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 your goals and the immediacy of each. If you’re saving for a vacation a year from now, figure out the price tag for your trip, divide by 12, and that’s how much to stash away each month.
Recommended: 25 Items That Are Worth Saving For
3. 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 putting money in just any account, look for a high-interest savings account to increase the returns of your automated savings.
There are different ways to earn more interest on your money. Some 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. Or look for an online bank which, since they don’t have to pay for brick-and-mortar locations and in-person staff, typically pay higher rates than traditional banks.
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4. 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 your pay before it even lands in their bank account.
Some companies will also match 401(k) contributions up to a certain level each year. Aim to earmark at least enough to get that match; otherwise, it’s akin to leaving money on the table. It’s an easy way to increase retirement savings.
Recommended: 15 Creative Ways to Save Money
5. Paying Bills Automatically
The late fees associated with missing a bill payment needlessly take a bite out of savings. So if you’re 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.
Being organized with your bills is important, but you don’t need a great memory to stay on top of rent, car, and utility payments — these can usually 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 alert 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.
6. 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.
Here’s where technology can definitely give you a boost. Instead of crunching the numbers week after week and month after month, apps and other digital tools can improve the ease of fulfilling this important, but arguably boring, mathematical task.
Your bank may well offer an automated tool or dashboard that shows in real-time your spending and saving. This means you can pay attention to account balances and itemized spending category breakdowns. That super clear picture of where money is actually going may also 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. These can be helpful when you are trying to maximize your savings and achieve a sense of financial security.
7. 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.
8. Use a Cash-Back Card
If you have a cash-back credit card, you may typically use that 1% to 5% back on purchases to…purchase more. Instead, direct your cash-back rewards into a savings account. Whether you get $10, $100, or more in cash back per month, it will help your savings account grow.
9. Funnel Your Windfalls Wisely
If you typically get a tax refund or a bonus at work, send that money into savings (or at least some of it) versus checking. Sure, it’s fun to get an infusion of cash and go shopping or dining out, but you can hit those financial goals more quickly if you send the money straight to savings, where it can earn compound interest and grow.
Automating your savings can help ease your path to reaching your financial goals, from saving for a wedding to nurturing a retirement nest egg. This process is quick and convenient, and doesn’t require you to remember regular money transfers nor break out the calculator to see where you stand financially.
Automating your finances can be extra simple when you open an online bank account like SoFi Checking and Savings. You can spend and save in one place, and, if you sign up with direct deposit, you’ll earn a terrific 4.50% APY and pay no fees, which can help your money grow even faster.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 8/9/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet..