Setting up an automatic savings plan is a simple way to make saving easier each month. With an automatic savings plan, you initiate the setup, and let the system handle the rest. If you’re ready to ramp up your savings efforts, it’s time to learn how to create an automatic savings plan and why it’s a useful tool for managing your money.
How an Automatic Savings Plan Works
An automatic savings plan is very straightforward. You schedule a recurring deposit from your checking account to your linked savings account. The frequency of the deposit depends on how often you get paid and your personal preferences. For example, if you are paid bi-weekly on Fridays, you might schedule an automatic deposit from your checking account to your savings account for the following Tuesday. This gives your paycheck enough time to clear.
Or, if you receive a paycheck once a month, you could arrange for your savings deposit to happen automatically on the same schedule. It’s not necessarily the timing that is important in an automatic savings plan; rather, it’s the consistency that matters.
Automatic deposits into your savings account take the need to think about it away. In fact, the money is deposited before you have the chance to worry about expenses or how much money is left. And when saving is automatic, there’s less chance that you will spend it on unnecessary purchases. In fact, once automatic savings deposits become a habit, you may find that you don’t feel a pinch in your finances at all. You’ll be glad for this if an emergency arises, and you need to tap into your extra funds.
Modern technology makes it very easy to set up an automatic savings plan. It’s usually easier to open a savings account at the bank where you have a checking account and link them together. But you can also link a savings account at another bank. And you’re not limited to just savings accounts. You can set up an automatic recurring deposit into an Individual Retirement Account (IRA) or a Certificate of Deposit (CD) account, as long as the CD allows for additional monthly deposits.
If you currently have direct deposit through your employer, the simplest and most effective way to create your own automatic savings program is to have part of your paycheck directly deposited into your savings account. It doesn’t matter if it’s $10 or $500 – simply setting this up will automatically ensure that you save money every time you get paid, and the rest will flow as usual into your checking account to cover monthly bills and needs.
How to Maximize Your Automatic Savings Plan
Creating an automatic savings plan is a step in the right financial direction. But it’s important to make sure you’re utilizing it fully. You can do this by:
- Reviewing your budget regularly to identify if you have extra money to save.
- Setting clear goals for automatic saving – whether for the short-term or long-term.
- Using a high-yield savings account to earn a better annual percentage yield on the money you set aside.
- Choosing a savings account with low fees, so you can keep all the interest you earn.
- Withdrawing from your savings account only when absolutely necessary.
In April 2020, the Federal Reserve removed the limit of six monthly withdrawals from savings accounts under Regulation D. However, excessive withdrawals from savings accounts run counter to the goal of having an automatic savings plan.
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Sources:
Federal Reserve. “The Federal Reserve Announces Final Temporary Rule to Eliminate the Six-Withdrawal Limit from the Definition of ‘Savings Deposit’ Under Regulation D.”
Source:
https://www.thebalancemoney.com/how-to-create-an-automatic-savings-plan-1289900
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