Automate Savings and Retirement Contributions
The best way to build wealth is to automate savings and retirement contributions. Consistently saving is the only way to build wealth over time. Automating savings is putting in place systems which automatically direct money into savings accounts, so you don’t have to think about it. Automating contributions to savings and retirement accounts makes it easy to consistently contribute to your accounts. Business insider, a financial and business news website, surveyed certified financial planners on their preferred wealth building techniques. The financial planners overwhelmingly endorse automating retirement account contributions and auto-transfers between bank accounts. Andrew Westlin, a Certified Financial Planner at Bettermint, states, “Through automation, you’ll spend less time thinking about saving and can use that free time and mental capacity to better yourself; whether that’s making yourself more marketable to increase earning potential or figuring out your passion and purpose and making a career out of it.”
The most difficult part of saving money is taking the time and having the willpower to log into your accounts and transfer money into savings accounts. It takes only minutes to automate your savings, and once you do, your money will be magically moved from your checking account to your savings accounts without you needing to think about it. The easiest accounts to automate are employer-sponsored retirement accounts. Maximizing contributions to 401(k)s and IRAs is as simple as completing a form or an online submission. Contributions to these accounts are pretax, so the money will be taken out before it reaches your bank account and has the added benefit of improving your tax situation. Additionally, many employers match employee 401(k) contributions up to a certain percentage or dollar amount, which is free money available to you only if you’re contributing yourself.
After you max out your retirement accounts, make sure you are maximizing your other savings. Contact your payroll provider and divert a portion of your paycheck into a savings account not used for everyday expenses. Consider opening an account in a different bank than your primary checking account to avoid temptation, and look for a high yield savings account. You can periodically funnel money from this account to other investment accounts if you choose. Try to save at least ten percent of your income. If you can’t save that much, anything is better than nothing. Start low and try to increase over time. Westlin says, “Challenge yourself to increase your savings rate every time you get a raise, or even on a regular cadence, such as once per year.”
After studying more than ten thousand millionaires, Author Chris Hogan found the main behavior they share is consistency. Hogan writes, “They know from experience that wealth-building is a long-term frame, and they’ve seen that sticking to the plan over decades leads to millions at retirement.” Eric Rosenberg has developed a four-step savings automation strategy over a decade. Step one is directing your payroll provider to make contributions to your 401(k) and other savings accounts, as discussed above. Step two is to set-up automatic bill and credit card payments so you don’t accumulate debt or accrue penalty payments which can severely hinder long-term savings. Rosenberg notes, “You can also automatically pay most utilities and other bills.” He advises paying for everything possible on a credit card to maximize rewards and paying everything else via electronic transfer. However, he cautions to make sure you pay off your credit cards in full every month to avoid interest charges. Step three in Rosenberg’s system is establishing scheduled automated transfers from your checking account to investment accounts, explaining “As long as you can afford it, you can automatically save an emergency fund, vacation or travel fund, save for a goal like a wedding, or automatically add to a brokerage account that you want to use for dividends as part of an early retirement plan. There are no rules.” Rosenberg calls step four “Round it out with round-ups and apps.” You can employ apps like Acorns, Qapital, and Digit to round-up purchases and deposit the extra money into savings.
Other great methods of increasing your savings are saving your tax refund, earmarking income for investment, favoring interest-bearing accounts, and knowing when your bank charges fees so you don’t get hit with unexpected charges. Regardless of whether you employ all or some of these techniques, or can save a little or a lot, the most important thing is to start saving. Once you start saving, automation can make saving easier and help maximize your return on investment.