Automate Your Savings (10/365)

Whenever I find myself with extra cash in my pocket, I’m often tempted to spend it. I usually look at that cash as having already been accounted for, so there’s really nothing bad about spending it on something fun, right?

When those thoughts pop into my head, I know exactly what I need to do. I just go empty that spare change into the spare change jug on my dresser. That jug contains a mix of coins and dollar bills that have found their way into my pockets.

In a way, the same exact thing is true with my checking account. If I look at my checking account balance and it’s quite high, I can sometimes feel tempted to spend money on things that I don’t really need.

The solution for my checking account is really not all that different than the solution for my pocket change. I have a plan for that money, a plan that’s so incredibly simple that it becomes trivial to follow it.

Automate Your Savings (10/365)

I simply pay all of my bills automatically out of my checking account. Online banking makes this a snap. I just have every bill I possibly can – and that’s most of them – set up to pay automatically near their due date each month.

This serves several purposes.

First, I don’t really have to think about it. Once it’s all set up, there’s not really anything to do. Your bank just automatically does it for you. Your bills are paid without even having to lift a finger.

Second, it adds just a bit of concern about excess spending from my checking account. This, for me, is a very good thing. I know that when I look at my checking account balance there are going to be further withdrawals from the account automatically. It’s similar to the sense that I get when I know there are outstanding checks, except that I don’t actually have to write the checks.

I’m encouraged by this to not spend frivolously from my checking account and instead make better choices about how to spend my money, because the consequences of going ahead and spending – potential overdrafts, potential missed bills – are worrisome. I’m simply more careful about my checking account.

Third, I’m never late for bills. If everything is paid automatically and set to arrive before the bill’s due date, then I know I won’t be late for bills. I don’t have to check due dates. I don’t have to remember to make sure that a certain bill is paid. It just happens.

Fourth, it saves me time in the process of paying bills. I don’t have to sit down with a checkbook and a calculator every two or three weeks to pay a pile of bills. They’re just paid. I check my online banking perhaps once a week as part of my normal web surfing, taking perhaps a minute or two, and that’s it.

Finally, it enables me to reach savings goals. This is really the clincher for me. If I’m saving for a goal (and I’m usually saving for two or three of them), I can automatically have the money routed away from my checking account into my savings account (or accounts). The amount would be whatever it would take for me to reach my goal in the desired timeframe.

So, let’s say I’m saving so that I have $10,000 to buy a car in four years. That takes 48 months, or 204 weeks, to achieve. I might decide to have $50 taken out of my checking account every week for the car, or $200 every month. This could all be done automatically so I never have to think about it. Then, at the end of the four years, I have the $10,000 I need to buy myself a nice car without going into debt for it.

Automation is the key to all of this. It saves time, it keeps you psychologically from sinking into a spending routine, and it helps you achieve your savings goals. Automating your finances as much as possible is an essential tool for personal finance success.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book 365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.

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21 thoughts on “Automate Your Savings (10/365)

  1. Joe says:

    This is how we save for travel/vacations as well. A very painless amount of $25 per week went into the account with ING. The next time I looked at the account, there was over $1,200.

    Very powerful.

  2. Vicky says:

    I found this very simple to follow as well. I started when I had NO spending room – I put $5 a week. Then when I had adjusted to this, I made it $10 a week.

    Then when I got a raise at work – I moved all the money from my raise into the savings account, and kept living at the same rate. I’m hoping to replace the floors in my house and take a vacation to Hawaii some day, so this is very helpful!

    I’ve also taken advantage of saving when I don’t spend :p For example, if my friends go to Starbucks, and I WANT to go but don’t? I’ll take the $5 I would have spent, and shuffle it over. Then I’ve REALLY saved the $5!

  3. Tracy says:

    That’s what I do – I treat my savings account as another bill that needs to be paid. But I actually set up all of my bill payments (plus my saving ‘bills’) to be paid on the paycheck before they’re due.

    I make the savings ‘bills’ very generous – both for specific purchases and for general savings. Then I keep a mental minimal balance I won’t go below and so anything else is my fun money.

    But since I’m aggressively saving per paycheck, I really don’t have to spend any energy worrying about if I *really* need something I think I’ll enjoy – I don’t have any debt, my savings are going aggressively, so if I want something shiny, why not? That’s what the money’s there for.

    (But I differ from Trent in that I never have the urge to spend money just because I have it … For me, it’s always about the specific items, so it’s really all about ‘is this pocket change or something to save up for?’)

  4. valleycat1 says:

    My routine is to take a little bit of time (half hour, probably) the first weekend after my monthly payday to reconcile my checking account. Then I record all known expenses for the upcoming month (some are electronically paid, some with checks & estimating things like utilities that vary), look to see how many weekends I’ll be doing the weekly shopping (4 or 5 depending on the month) and deduct the budgeted amount. Then I can quickly see how much ‘extra’ money I have, which should be a consistent amount if I’m following the budget. That way I don’t have to keep a vague idea that there are upcoming withdrawals so I can’t spend anything. When the routine expenses are paid or I am notified of the due date, I enter that date alongside what I’ve already written in the register.

    To me, if the money in a change jar is accumulating quickly, that means I am pulling too much out of my checking account & need to adjust that. Or, at least, use the money in the jar instead of withdrawing more from the bank.

    Although we keep a piggy bank handy for the odd accumulation of coins, I don’t routinely sweep paper money into it – otherwise I end up making andother ATM withdrawal sooner rather than later. I have an amount I allow myself to carry in cash, drawn weekly, and pretty much spend it.

  5. valleycat1 says:

    #3 Tracy said “I never have the urge to spend money just because I have it” – good point. I rarely, if ever, have that urge either.

  6. lurker carl says:

    Your banking institution wants you to automate as much of your money as possible because you’re less likely to switch banks after setting up your direct deposits, automatic transfers and bill payments. Don’t get so comfortable with automation that you forget about it. Mistakes happen, things change – keep on top of your accounts.

  7. Roberta says:

    Trent – I’m very puzzled by your opening statement about being tempted to spend your pocket money. Isn’t that what it’s there for – to spend as you choose? If you’ve paid all your bills, set up your automated savings, are meeting your budget and have the leeway for a little spending cash, what on earth is wrong with spending that modest amount of pocket money you allot yourself?

    I usually buy flowers with mine. Totally unnecessary, very transient, can’t eat them or keep warm or educate my children or support my old age – but I smile when I see them on the kitchen counter.

  8. Kerry D. says:

    Not to mention a pedicure–I can get it for $22 including tip at the little shop down the street… so, if I hold on to a bit extra each week, I can even go once a month if I wish. I enjoy the polish, and the professional treatment of cuticles and callouses is a real (and practical) treat. That’s the wonder of pocket money. :)

  9. Julia says:

    Roberta – I think this is one of those values questions. I can see both perspectives. If I find a little change in my pocket I might be tempted to get a can of soda from the vending machine. Or I can dump it all into a jar to add to my savings account later. Or I can keep it in a bag in my purse to buy flowers when I have enough. What I envisioned when he read is first paragraph is my temptation to hit the vending machines. I like both the savings account option and the flowers option much better than the vending machine option.

  10. Julia says:

    I also have that urge to spend money just because I have it. But I hate automatic bill pay, and I’m even a little cautious about automatic savings.

    Instead, I have a monthly ritual where I do my budget and pay my bills all in one evening.

    I have my paychecks direct deposited into a savings account I don’t have easy access to. A few days before the end of the month I review my budget for the upcoming month. Then I’ll transfer to my checking account only as much money as I plan to spend that month. I’ll also transfer money from my “inbox” account to other savings accounts for specific purposes. Then schedule online bill payments to be paid as soon as there’s money in my checking.

    This has become so routine that it only takes me about 30 minutes. And I’ve grown to enjoy because this is also when I check my progress on my financial goals.

    The result is that 90% of my money is spent or in the appropriate savings vehicle w/in a few days after it’s available to me and I never have more than a couple hundred in checking to be tempted with.

  11. krantcents says:

    I have had automatic savings since 1973. It helped me make my first investment or pay for real estate taxes. By 1985, I achieved financial freedom because of savings.

  12. NCN says:

    I love the idea of automating savings – and debt reduction – but it’s also cool to make some “extra” deposits and payments, along the way. I love it when I’m able to log in to my bank account, schedule an immediate transfer to savings, and know that I’ve saved, above-and-beyond, that month’s savings goal. (Enjoying the series revisit, btw!)
    -NCN

  13. deRuiter says:

    “I simply pay all of my bills automatically out of my checking account.” I have my monthly bills automatically paid through my Continental credit card. Twice a month I pay that in full with a bank transfer. This way I get all the benefits mentioned in this column (plus saving 44, soon to be 45 cents per envelope, and the envelopes!) and I collect frequent flyer miles. Using the card this way boosts my credit report numbers, keeps me from missing a payment late fees, and generates an almost free airline ticket (if you don’t use BA which has outrageous fees and must be ignored) every year or two. Using the airline charge card, I get something back (almost free flights), using the method in the column you don’t get the extra bonus, which can be worth hundreds of dollars.

  14. deRuiter says:

    Having money taken from the checking account and transfered to savings like an online ING account to save for a car or other big goal is a fine idea. When it’s time to buy the car, and the deal is set, price agreed, I whip out the airline charge card and pay as much as the car company will allow to be put on the card. This amount is negotiable by the way, most companies will say there’s a $5,000. limit, but if they really want your deal, and you are pleasant but firm, you can boost it up to $7.500. or even more. You charge what you can, then transfer the money from savings into the credit card account to make the payment. If you paid by check or cash you would not get this extra bonus towards a trip. It only works if you pay off your card in full each month. On our last new vehicle, the dealer offered a $1,000. discount for financing all or part of the vehicle. We read the contract with magnifying glass, and there was no prepayment penalty clause. We paid the downpayment with combination of credit card and cash (paying off the credit card charge from savings as soon as the charge appeared). We took a loan for $10,000., made one loan payment and then paid off the vehicle in full, thereby saving almost all of the $1,000. discount, for a negligible amount which was the first month’s loan payment interest. It pays to read the fine print!

  15. Tom says:

    “I don’t have to remember to make sure that a certain bill is paid.”
    While your bank probably takes liability for unpaid bills when you use the auto-payment option, I disagree here. I’m still neurotic enough to check my automatic payments. One time, my bank’s billpay was late paying my electric bill and there was a late fee. If I hadn’t checked the statement, I would have paid for my bank’s mistake.
    Also, I’m not comfortable auto-paying bills that are variable from month-to-month, like utilities or credit cards. The process of paying these is a reminder as to how much energy/water/whatever I’m using, and helpful to curb waste.

  16. valleycat1 says:

    A good way to train yourself out of randomly deciding to pick up something & buy it (or any other unwanted thought cycles you want to get out of) is to just say Stop as soon as you are aware you’ve gotten caught up in it. To reinforce it, if you’re visually oriented, picture a big stop sign; if you’re more tactile, a playful slap on the wrist. In the case of “I still have $X in my pocket so I’ve got to spend it now”, the Stop could come at any point – from when you realize you’ve had the thought all the way through to bringing the item home (or getting ready to open that pack of gum). You can return the item. And if your kids see you modeling that behavior, they’ll get a good lesson in self control and options.

  17. valleycat1 says:

    Re autopay concerns – I have many of our bills on autopay, but I limit the ‘automatic’ idea of that only to the payments being scheduled to be paid on time. It isn’t that I’ve set up autopay and never have to think about that bill again.

    I read and record the notices I get from the companies that they have been scheduled & check my bank account soon after that date to be sure they’ve gone through.

    I had one fail a few years ago when the company changed its software & their update recorded my bank account number incorrectly – fortunately I realized the issue and got it resolved.

  18. Other Jonathan says:

    We have very few bills but pay what we can online – student loan payments (automated), credit card payments (manually scheduled), donations (automated). We don’t “automate savings” because we don’t maintain a savings account. Rather, all our money is stored in checking accounts until we invest it, usually in large lump sums. An aspect of “paying yourself first” by automating transfers to savings that I don’t like is that it seems to set an artificial limit on savings. If you think of it as “well, I’ve paid my savings bill and all my other bills, and I have $XX left over this month to spend!” then you’re likely to spend that money. It also doesn’t necessarily account for monthly variations in spending due to irregular bills. We prefer to just think of any money we don’t spend as money we’ve saved, and it just accumulates until we invest it. We don’t have savings targets, other than “as much as possible,” and we don’t have spending limits, other than “as little as reasonably possible while not depriving ourselves.” There’s always money for a purchase or a trip or a night out available, but we think long and hard about whether such expenditure is worth it in light of our long-term goals.

  19. Johan says:

    Automatic payments and savings are great, and we use it for most of our accounts, the only exception being credit card payments (which vary a bit). My income also varies a bit (we have a bonus system which means I can make up to 2000 dollars extra per month – or not).
    All banks I have ever used are very helpful when it comes to deducting a fixed amount every month and move to a savings account. They also love taking care of our bills online.
    But what I have not found is a bank that offers a setup which pays your bills, gives you an “allowance” (to pay commuter tickets, lunch money, etc) – and puts the reat in the savings account. This would be extremely helpful in increasing our savings, something we really need to do.
    Anyone have any experience with a setup similar to that? Or know of a bank which does something similar?

  20. Tracy says:

    @Johan

    It’s actually pretty easy to do, you just have to reverse your thinking. Instead of having your paycheck deposited into your checking and then a fixed amount moved into savings, do the opposite – have your paycheck deposited directly into your savings account (almost every bank will do this) and then have the automatic transfer once or twice a month of your fixed expenses + allowances into checking.

  21. Skrpune says:

    I automate everything I can – if there’s a no-fee option to pay automatically with a CC, I do it and reap the rewards (CASH!) benefits; if there IS a CC fee, the auto-bank-debit option is usually free. I only end up paying a couple bills directly from my bank account – the CC monthly bill (paid in full each month), my gas bills, and my electric bill. There’s only one bill I can’t automate just yet – condo monthly assessment; once our new management company gets auto-debit setup, I’m on it.
    I also automate our savings. I started small with weekly contributions to a main savings fund, expanded to multiple funds, and increased contributions as my income went up. That last part is important – don’t increase spending when income increases. I don’t feel the difference on a day to day basis (same amount of money to spend on what I need to spend it on), but over time, that little extra here & there adds up to a lot.

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