Automatic savings: the only magic in personal finance
- November 8, 2009
- 3 comments
- Posted in Latest Posts, Savings & Debt
I probably shouldn’t admit it, but I’ve always been bad about saving money whenever willpower was involved. You have my total admiration if you can actually “pay yourself first” by writing a check to your savings account every time a paycheck comes in. I’ve tried it and failed. Some months, that check got written. Some months a mousie ate half the money that I meant to put away. Some months “I couldn’t afford it” and saved nothing at all.
Mostly, what I see in my bank account, I spend. That’s why I’ve always been such a fan of hiding money from myself. I put my savings on automatic pilot, so that no willpower is required. I live on what’s left, after those savings have been deducted from my pay.
Retirement savings: Company 401(k) plans and similar accounts are terrific for saving money automatically. The money comes out of your paycheck before you see it, so you can’t be tempted to overspend. Effectively, your company forces you to “pay yourself first.” Some companies match your contributions, up to 5 or 6 percent of pay, but you shouldn’t stop there. Keep raising your savings, to 10 percent when you’re in your 30’s and at least 15 percent as you get older.
What if you don’t have a company retirement savings plan? You can set up an Individual Retirement Account. Then arrange for an automatic transfer from your bank account to your IRA every time you get paid. That’s like writing the check yourself, except that it happens without your lifting a finger. For simplicity, you could use the IRAs sold by the bank, but they’re not the best ones. For low-cost IRA investing, I always recommend the mutual fund groups, Vanguard, Fidelity, or T. Rowe Price. AARP has some low-cost funds for people 50 and up. For more on buying your own funds, see the entries under Investing.
Ready savings: You also need short-term savings, for specific expenses that you know are coming up. For example, if you’ll have taxes to pay next April, that money should be stored safely in a bank savings account or money market mutual fund. Savings earmarked for tuition anytime during the next four years should be in a mix of savings accounts and insured certificates of deposit. Don’t put this money into stocks. If the market drops, you won’t have the cash to pay the bills.
As for emergency savings, I ask you: How many people really keep much emergency money around? Not many, even though it’s a key financial planning move. You know the drill: Keep six months worth of basic household expenses in the bank, and even more if you’re self employed. That’s cash for unexpected costs, such as an uninsured medical bill or to keep you going if you lose your job. If you don’t, or won’t, save that much, try for a kitty that will cover your mortgage or rent, utilities, food, transportation, and the minimum on your credit card bills for at least three months. It doesn’t matter that the interest rate on savings accounts is low. This isn’t an investment, it’s your safety net. As further protection, pay off your credit cards so that you’ll have borrowing power if trouble hits.
You can make automatic contributions to emergency savings, too. Using your online account, tell the bank to pay money every month into a savings account until you’ve reached your goal.
Finding the money to save: With all this automatic saving, you probably worry that you won’t be able to pay your bills. But believe me, you will. There may be a bit of a squeeze during the first few months. After that, you’ll discover that you’ve somehow cut your spending to the amount of money that you see in your checking account. If you don’t see it you don’t spend it. Your standard of living won’t change, you’ll just be picking up money that slips through your fingers without your knowing it, and saving it for the future. It’s the only magic I know of in personal finance, and it always works.
Tags: 401k, automatic saving, paycheck, retirement savings, saving money
Hello, probably our post is off topic but anyways, Having been browsing around your weblog and it looks very neat. It’s obvious that you know the subject and you seem fervent about it. I’m creating a new blog and I am struggling to make it look great, plus provide the best quality blog posts. I
I know that Jane knows what she is talking about. I learned about mutual funds from her. She wrote about them in a women’s magazine years ago – 20 years ago?. I bought no-load mutual funds then and I still owe a few today. I have her book, Making the Most of your Money. It was a gift from my husband and it is one of the best gifts he has given me. I still use it. I would like to buy her new book though soon.
Thanks, Beth!