How Automating Your Savings Will Help You Build Wealth

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Saving for retirement takes planning and discipline. For those with discretionary income, oftentimes the desire for current consumption, from the newest cell phone to a nicer car to a bigger home, is just more satisfying than socking away money that you might not see for 30 years or more.

For those on tighter budgets, retirement saving can often seem like a luxury that is unaffordable. But automating your retirement savings is a great way to remove emotion from the equation and force yourself to save. Here’s exactly how it can help and how to do it.

Paying Yourself First

When it comes to retirement savings, an oft-quoted piece of advice is to “pay yourself first.” But what does that even mean?

The idea behind paying yourself first is that when you receive your paycheck, you immediately divert a portion of it to your savings. This way, the money is out of your hands right away and can’t be spent — or some would say “wasted” — on discretionary spending.

For example, if your regular paycheck is $3,000, as soon as you get it, you might transfer $300 to $600 of it toward your savings. This isn’t always as easy as it sounds, which is the reason automation is so important. Rather than having to remember to set aside that money every month, an automated transfer will take it out of your check right off the bat, without you having to do anything at all. 

Make Your Money Work for You

This also can prevent the human tendency to rationalize spending. For example, you might promise yourself that you’re going to use that $300 “this month only” for a special sale or travel deal, with the intention of paying it back later. Unfortunately, that’s usually a recipe for disaster, as it can be very hard to replace that missed month.

If it’s hard for you to put $300 in your savings one month, for example, it’s going to be twice as hard to sock away $600 the following month. 

An important thing to remember is that you don’t have to start saving 10% or 20% of your paycheck every month right from the start. The important thing is that you set up your program and start getting used to it. In the words of internationally recognized money expert Tori Dunlap, “Automate. Automate. Automate. Even if it’s just $20 a month or a small percentage of your paycheck, we want this to happen on autopilot and ‘pay ourselves first.'”

What If You Can’t Afford It?

If you feel like your budget is stretched thin as it is and that you can’t afford to save for retirement, you might have to make some tough choices. One way to help is to prioritize retirement savings as your most important budget line item. This likely will mean making cuts to other parts of your budget.

However, if you’re looking to start with just $20 per month in savings, you can usually find this amount if you look hard enough. For example, you might trim your budget for eating out or choose a less expensive mobile phone or streaming package. With a little sacrifice, you likely can find at least some money to tuck away for retirement savings, even on a strict budget.

Make Your Money Work for You

Can Even a Small Amount of Savings Build a Real Nest Egg?

It’s true that $20 per month isn’t a huge amount. But even small amounts can build up to fairly significant sums over time, thanks to the power of compound interest. 

Imagine you save $20 per month and earn an 8% return on that money over a 30-year period. What started out as hardly any money at all would grow to nearly $30,000.

What if you could sock away $100 per month instead — still not a huge sum — and invest it for 35 years? In that scenario, your nest egg could grow to more than $229,000. If you can work your way up to saving just $100 per week — or $5,200 per year — a 35-year savings program at 8% interest could net you nearly $1 million.

How To Automate Your Retirement Savings

What’s great about automating your savings is that it’s very easy to do. Nearly all banks and brokerages now offer the ability to set up automatic account transfers with just a few clicks on your computer.

If you have access to a workplace 401(k) plan, setting up automated contributions might be even easier. All you’ll have to do is instruct your plan administrator to take either a percentage or a fixed dollar amount from each of your paychecks and deposit it into your 401(k) account.

If you’re working strictly with a bank, be aware that internal transfers — such as from a checking account to a savings or investment account at the same firm — can often occur instantaneously. However, even moving money from your checking account at one bank to an investment account at another will generally take just a few business days. 

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