You’re committed to saving money, but you’re not convinced that automating this process is truly serving you. While it’s an easy way to put money aside, it isn’t necessarily as straightforward as it sounds.
If this sounds familiar, you’re not alone. Many people have determined that the negatives outweigh the positives when it comes to automating their savings.
Lack of Control
He used to have money automatically transferred to savings once a month, but Alex Alexakis, founder and CEO of digital marketing company PixelChefs, said the lack of flexibility was an issue for him.
“Sometimes, I would need to use that money for something else, and I would have to manually transfer it back to my checking account,” he said. “This was a hassle and it made it harder to stay on top of my finances.”
Lack of Motivation
Manually transferring money to his savings account makes Alexakis more mindful of his financial goals.
“When the money was automatically transferred, I didn’t think about it as much,” he said. “I just assumed that the money was going to my savings account and I didn’t give it much thought.”
Milosz Krasinski, managing director at Chilli Fruit Web Consulting, a London-based boutique digital and public relations agency, agreed that making the transfer himself was a much-needed psychological shift.
“Manually transferring money to my savings account gave me a sense of accomplishment,” he said. “It kept me involved in my financial growth and this was far more motivating than the impersonal automated process.”
Lowering Savings Potential
As the managing director of a company, Krasinski said he used to automate 20% of his monthly salary to go directly into his savings account.
“I had read that 20% was the standard, a good amount to save, and initially, I was extremely content with this arrangement,” he said. “It was a ‘set it and forget it’ approach that allowed me to accumulate wealth without even lifting a finger.”
However, he said he started to see the flaws in this method over time.
“While I was indeed saving money, I wasn’t necessarily making the most of my financial situation,” he said. “The fixed percentage didn’t account for fluctuations in my expenses or the occasional surplus in my income.”
He said this also changed his mindset toward his money.
“I had started to view my salary in post-savings terms, like the remaining 80% was all I had to spend,” he said. “I realized that I was accumulating more than I needed to spend, and thus, could have easily been saving more than that initial 20%.”
This caused him to switch to a manual saving method.
“The most significant change I noticed was the shift in control,” he said. “Now, I could adjust my savings based on my income and expenses for that month.”
He said the added flexibility allowed him to maximize his savings, without feeling the need to compromise.
“If I had more left over, I could deposit that surplus into my savings account,” he said. “If I had unexpected expenses, I could save a little less.”
Alexakis agreed that his monthly automated transfer to savings also caused him to save less.
“This amount was actually pretty low,” he said. “I didn’t think about it much at the time, but it wasn’t enough to reach my financial goals.”
Diminished Financial Awareness
Automating her savings caused Prerna Jain, founder of Ministry Of Cleaning, a residential and commercial cleaning company in Melbourne, Australia, to gradually lose touch with her financial situation.
“While it was convenient not to worry about transferring money manually, it also made me complacent,” she said. “I stopped paying attention to my bank statements and financial goals, blindly trusting that the automated process would handle everything.”
She said this caused her to miss opportunities to optimize her savings and investments.
Overlooking Hidden Fees
“When I set up automated transfers, I chose a savings account with a higher interest rate,” Jain said. “However, what I failed to consider were the hidden fees associated with that account.”
Over time, she said these fees negated the benefits of the higher interest rate.
“It taught me the importance of researching and comparing all aspects of a savings account — not just the interest rate,” she said.
Is Automating Your Savings Always a Bad Idea?
Clearly, automating your savings doesn’t work for everyone. However, that doesn’t mean it’s not a good idea for anyone.
“In my over 30 years of advising clients how to get from point A to point B, financially, automating savings in most cases is a great idea,” said Kevin Ross, CLU, ChFC, senior managing director, private wealth management, at Bridgeway Wealth Partners, LLC. “In order to reach their retirement goals, clients must put away a certain amount of money every year.”
He said treating your required savings as a recurring expense helps you avoid spending that money.
“For people in cash flow irregular businesses that can’t do a monthly ‘set and forget’ savings plan, they should keep the same mindset of automating, but just extend out the time period for saving to best fit your cash flow,” he said. “Automate quarterly, semi-annual or even annual savings goals — but no more than annually.”
Ultimately, saving money is always important. Whether you choose to automate this process or not, it’s always wise to put money aside on a regular basis to create financial security.
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