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Automatic Savings: The Key to Stress Free Finances

calculating expensesEarlier this week we talked about paying certain bills annually as a way to save money. Even if the discount is only 5% or 10%, it adds up over time. Monthly payments take more work, more money, and can cause extreme stress when you get hit with an emergency.

Being able to pay annually for bills or any other type of big expense requires that you have an adequate amount of savings. Today, I’ll offer my experience on how you can achieve a high savings rate without having to rob a bank to get started.

Determine Your Expenses

As I’ve said since starting this blog, if you don’t know where your money is going, you’ll never be able to save or pay debt. If you don’t track your expenses, take time to go back over the past year and see how you spent your money. If you have online banking, it should be pretty simple. If you use lots of cash and don’t save receipts, it might be impossible, but you can start tracking from today. Look for big expenses like car insurance, life insurance, HOA dues, money spent on contact lenses, or gym memberships. If you can pay these annually, there is a good chance you’ll get a discount.

Add all these expenses together and divide by 12. This is the amount you need to save per month.

 Automatic Savings Deposits

It is really easy to set up an automatic savings program. All you need is a main bank account and an alternative account that will hold your savings. I think it is easier to meet your saving goals if you follow a few steps.

  •  Make sure the savings account is harder to access than your account from which you pay bills. If you have to log into a different site to withdraw money, that gives you more time to think about if you are spending wisely or not.

 

  • Have your employer direct deposit money into two accounts. It is super easy to split your paycheck into two bank accounts. You don’t have to think about making deposits yourself, and when you log into your savings account, you can be pleasantly surprised at the balance.

 

  • Set up auto deposits yourself. If your employer doesn’t offer direct deposit, all you have to do is set up your main bank account to deposit money from checking into your savings account the day after you receive your paycheck. If you wait to do it manually at the end of the month, there is a good chance you’ll find something else to spend the money on.

If you have irregular income, you’ll have to be very focused on saving more during the good months. If you can keep your monthly expenses low and not spend more in the months when you make more, this should be easy. I know lots of realtors, and the ones that stay in business and do well over time are the ones who sock away lots of money during the good times. You can tell the ones who don’t because they will be tending bar or working in retail during down turns.

Do I Need Two Banks?

Of course if you are disciplined, you can use one bank and simply have a checking and savings account, but I found after I started saving a few years ago, it was too easy and tempting to quickly transfer money into checking if I found a good sale or something I thought I needed.

This Seems Like A Five Year Old Could Do It

Yes, I realize setting up a savings plan is extremely simple. You might feel like I’ve dumbed it down today, but I see people every week who can barely afford an eye exam and one box of contacts.

Often, when this happens, we find a panicked call on the answering machine a couple of months later because the last pair of contacts got flushed down the toilet, eaten by the dog, drunk by the boyfriend (I could go on and on…)

This person needs contacts today, even if that means paying top dollar or overnight shipping if the product is not in stock. If people would simply set up a savings plan, they could buy a whole year supply at once, getting a discount and a rebate in many cases. I think this type situation applies to much more than contact lenses. Is it a matter of not knowing how or choosing not to take action?

The First Year Is the Hardest

The first year of automatic savings is the hardest because you are trying to build up your balances while still making annual payments on many things. You might get started and have to stop if an emergency hits, but don’t give up.

If you can manage to build up your savings to cover large annual expenses, you will save thousands of dollars over time plus relieve the stress about where the next payment might be coming from. I hope you make it a goal this year to never pay more than you have to because of poor planning and lack of savings.

How do you handle large expenses? Do you have a secret recipe to force yourself to save? Have an interesting story about losing your last pair of contacts?

Image: Freedigitalphotos.net/Miles

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

11 comments

  1. LOL, funny stuff about the contacts. Years ago when I was on a trip (part of which included the gorgeous state of CO, I was putting in my contact (didn’t have an extra pair with me – learned from that experience) and one of my travel mates, seriously drunk, stumbled over happily to talk to me, grabbed my hand so she wouldn’t fall, and tore the contact into pieces. I was seriously p-ssed!! That was when I learned to always have an extra pair of contacts on hand. I went the whole rest of the trip with one contact. :-)
    Laurie @thefrugalfarmer recently posted..5 Things You Shouldn’t Do To Pay Off DebtMy Profile

  2. One of the benefits at my work is the employee stock purchase program. With the ESPP I have 10% taken out every paycheck (the max) and get the stock at a 15% discount (or more if the stock went up from last purchase period). This allows me to not only save but also get a small bonus every six months from opting in. It’s automated and easy!
    DC @ Young Adult Money recently posted..Friday Giveaway Roundup – 202 GiveawaysMy Profile

  3. Couldn’t agree more that automation is the real key to building up savings. At this point I really can’t imagine living without it.
    Matt Becker recently posted..5 Reasons a Roth IRA Might be Right for YouMy Profile

  4. I actually have a few bank accounts. I have one that I rarely look at, so it acts like my emergency fund. I transfer money there each month at the same time and treat it like an expense. It is nice to look at it once in a while.
    Grayson @ Debt Roundup recently posted..From Zero to Hero And Back Again, Twice!My Profile

  5. I can only imagine some of the stories you get on “how I lost my contacts” :) Automation is a great way to make savings easy. You can’t miss what you don’t have to spend. We seem to be conditioned to spend what we earn and it can be very easy to talk ourselves out of putting money in savings if we have to do it manually.
    Shannon @ The Heavy Purse recently posted..Blog Round-Up: Week of January 13, 2014My Profile

  6. I first learned the benefits of automatic savings when I read “The Automatic Millionaire” years ago. I was immediately taken with the “simplicity” of the idea and wondered why more people don’t do it?

    Since then I’ve become quite a convert to “automating” my finances wherever possible – whether that’s my savings, paying my bills and so on. At the end of each month I spend a few hours going through the previous month’s statements to ensure everything is as it should be, and I have banking app on my phone for daily checks if necessary and by following this simple system I spend less time than ever before on managing my finances yet have been more successful than ever before.
    Richard @ About Cloud Storage recently posted..3 Big Reasons That Dropbox Sucks (And 5 Better Dropbox Alternatives)My Profile

  7. I don’t do anything automatic because I need to take percentages out of what I’m brining in, but I do find having various accounts online but not really quickly reachable has helped me save a lot more!
    Tonya@Budget and the Beach recently posted..Electric Bill/Link LoveMy Profile

  8. Seriously, why is it that you always think you have more contacts than you have and then you are getting ready to go on vacation and you realize you’re on your last pair? I have have an online savings account and a checking account at my local bank. I move money from the local bank to the online savings each month. It takes 5-7 days to get the money back to my checking account, which makes me think about whether I really need to move the money (a good thing since it’s savings).
    KK @ Student Debt Survivor recently posted..Sick and Tired of Being Sick and TiredMy Profile

  9. I automate retirement savings and do everything else manually. This is because we both make irregular income and I can’t totally count on a certain amount of income from one month to the next. And I have two checking accounts (one for bills, one for daily expenses) and one savings for everything.
    Erin @ Gen Y Finances recently posted..How will adding a pet to your family change your budget?My Profile

  10. Automating my savings was the first thing I did when I started to get my finances in order and it continues to be the best thing I ever did. I was able to pay for so many emergencies and planned things because of this. it’s a no brainer.
    Syed recently posted..Diamonds in the Rough Roundup 1/17/14My Profile

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