A recent Bankrate.com survey found that 20% of Americans don’t save, and another 21% saves only 5% or less (full article). This statistic is very unfortunate and is why so many people feel uncertain about retirement. Regardless of if you’re already saving, or you need to start, saving requires intention, dedication, and action. What if saving was just automatic? While savings requires you to manage a budget, there are ways that it can feel more automatic.
Imagine if your employer put money into a savings account for you each month as part of your compensation, but didn’t tell you. Then, at the end of the year, they gave you the account. How easy was it for you to save that money? The answer: SO EASY, because you didn’t have to do anything. In this case, you didn’t even know it was happening. One of the best ways to save is to simulate that situation yourself.
Here are several options for setting up automatic savings:
Participate in your employer’s retirement plan
How it works: You specify the percentage of income that you want to be invested in your retirement account. There are several options for types of investments; it’s important to consider the level of risk that you are willing and able to take. Employers often have a matching program, where they will contribute an additional amount based on the amount you contribute. We strongly encourage you to take full advantage of any employer match; otherwise, it’s money left on the table. Take a close look at the plan to ensure you understand the rules and risks, as well as the IRS contribution limits (e.g. $18,500 for 2018 (full details on IRS limits, click here). Remember, funds set aside in your retirement account are restricted and usually have a penalty for withdrawing prior to age 59-1/2.
Participate in an Employee Stock Purchase Program (ESPP)
You can only do this if offered by your employer, but it can be a great way to automatically invest each paycheck. How it works: Money is automatically taken out of your paycheck and put into an account. Stock is purchased (often at a discount) based on the predefined parameters and dates. There is risk with ESPP due to potential decreases in stock price once the stock is purchased. This method is my personal favorite because I don’t see the funds in my checking account making it easy to save, then I get an additional discount when the stock is purchased – extra savings!
Have your employer deposit your paycheck into two different accounts
One checking account for your expenses and a separate savings account for the amount that is realistic to save. Ideally, you use a savings account at another financial institution where you’ll be less tempted to transfer the money back into your checking account. Check out some savings account options here.
Set up automatic investing
You can either manually move money into an investment account, or set up an automatic transfer. Certain investment accounts allow you to automatically invest when your account balance reaches a specified level, so this is a great way to ensure that you’re continually investing. There is risk with investing, so ensure you understand the risks, prior to making any investment decisions.
Set up an automatic transfer each month from your checking account to your savings account
If you’ve ever heard the term, “pay yourself first,” it’s referring to making savings your top priority, and then keeping your expenses limited to the money left after saving. Setting up an automated transfer is a great way to treat your savings like a bill with automatic payment (to yourself) each month.
There are a multitude of options for setting up automated savings plans – it can be any of the above, or a combination of methods! You can always transfer money to savings at the end of the month when you know exactly how much you’ll save. I personally have a combination of automated and manual savings. If you haven’t tried automated savings, give it a try with a small amount. Once you determine that it works for you, increase the amount of the transfer to the full amount you save each month.
Trevi Tip: Instead of spending more when you receive a raise, set up an automatic savings transfer for the additional amount you’ll receive each paycheck. You won’t notice that it’s gone because you didn’t have it previously!
If you do implement automatic savings, the important thing is that you maintain the mindset that those funds are not to be used for monthly expenses. Remember to pay yourself first. Your future self will thank you!