Why Automating Your Savings Makes Sense
In theory, saving money should be easy – take a small portion of your paycheck each month and stash it away somewhere safe. But in practice, most people seem to find that difficult to do. For example, only about 18% of Americans save more than 10% of their paychecks each month (over $100 per paycheck), while 33% save nothing.
Humans Are Poor at Forecasting
Our brains always make short-term decisions rather than long-term forecasts. As a result, we’re hardwired to prefer a smaller reward in immediate gratification over a bigger reward at a later date. This is called present bias—and it doesn’t just impact our spending habits but also has an effect on saving for retirement and investing in general.
The Present Bias
If you are like most people, your mind is strongly influenced by a psychological concept called present bias. In short, we tend to prefer immediate over delayed outcomes. This explains why many have trouble saving money for retirement or other long-term goals. We’d rather spend our money today than save it for tomorrow, even if that means sacrificing future benefits. To counter present bias and help us save more effectively, financial experts suggest setting up automated savings plans and giving them access to our checking accounts regularly.
Could You Save More Money If a Robot Saves For You?
Saving money doesn’t come naturally to everyone. One of our most common New Year’s resolutions (is exercising and quitting smoking). But, if you don’t make your goal a habit, the chances are good that you won’t reach it at all. Luckily, there is a way to save without even thinking about it, which is automatic savings plans. These programs take a portion of your paycheck before you ever see it and invest in safe, high-yield accounts like CDs or mutual funds.
How Much Should I Save Automatically Every Month?
One of your primary financial goals should be to build up an emergency fund that provides enough money to pay for unexpected bills or a job loss. It can be tempting to dip into these funds whenever you face an expense, but they’re not for everyday use. The general rule of thumb is to save three months’ expenses. Depending on your situation, you may need more or less than that amount.
Automatic Savings for Student Loans
If you’re a student loan borrower with multiple loans, you may feel the temptation to ignore them or put them on autopilot. While paying more than your monthly minimum is smart, putting your student loans on auto-pilot can have serious consequences.
How to Start an Automatic Savings Plan
Once you’ve decided to save more, there are plenty of ways to do it automatically. For example, according to the experts at SoFi, “You can enroll in an automatic payroll deduction savings plan or 401(k) program at work.” You can also set up an automatic transfer from your checking account to a savings account for a small amount each month, which will help you start saving without feeling like you’re giving something up.
Studies show that customers are prone to making more significant investments with their hard-earned money. So if you can get them to start doing so in a small way automatically, then they’ll be more likely to transition into higher amounts over time. But, of course, you can always get advice about your finances from SoFI Invest (SoFi Bank).