Saving money is a lot like eating right. We all know that we should save for emergencies, retirement, and personal goals, just like we know we should eat more vegetables and fewer cookies. But doing it isn’t so easy.
The problem is temptation. It’s hard to keep from spending money when it’s sitting right there in your checking account. Something always seems to come up that you need that money for. Before you know it, you’re broke until your next payday.
That’s where automatic savings plans come in. They let you automatically set aside part of each month’s earnings in a separate savings account, where it’s harder to reach.
Benefits of an Automatic Savings Plan
Most people treat savings as an afterthought. They deposit their whole paycheck into a checking account, and they take money out of that account to pay the bills. Their savings is whatever happens to be left over at the end of the month. Unfortunately, that often means they save nothing at all.
With automatic savings, by contrast, you pay yourself first. A portion of your paycheck goes straight into savings and never hits your checking account at all.
Saving this way has several advantages:
- It Keeps Your Savings Separate. As the old saying goes, “Out of sight, out of mind.” When you keep your savings in a separate account, you no longer think of it as spending money. The money is still there if you need it, but you won’t just burn through it without thinking.
- It Forms Thrifty Habits. Sending part of every paycheck straight into savings forces you to make ends meet with what’s left. Over time, you get into the habit of living on less. Once you get used to it, you may not even miss the extra money.
- It’s Effortless. Once you get your automatic savings plan set up, it keeps going by itself, with no help from you. There’s nothing to remember and no math to do. Instead of second-guessing yourself, asking how much you can afford to set aside each month, you can sit back and let your savings take care of itself.
- You Can Save for Multiple Goals. People save for many different reasons. For instance, you might be trying to build an emergency fund, set aside money for retirement, and save up for a vacation. With automatic savings, you can pursue all these goals at once. You can set up several savings accounts, one for each goal, and transfer a fixed amount into each one every month. This makes it easy to keep all your savings goals on track.
How to Set Up an Automatic Savings Plan
To start an automatic savings plan, you need two separate accounts: savings and checking. The checking account is for your everyday spending money. This is the account you use to cover the bills and any extras. The other account is where your savings will grow over time.
Here’s how to set up a basic automatic savings plan:
- Set Up a Savings Account. If you don’t already have a savings account, open one. Then, link your savings and checking accounts so you can transfer money freely between the two. The easiest way to do this is to set up your savings account at the same bank where you have your checking account. However, using an online-only bank like Ally Bank or Capital One 360 can give you a better interest rate. It also makes it harder for you to get at your savings – which makes you less likely to dip into them.
- Set Up Direct Deposit. Arrange to have your paycheck deposited directly into your savings account – not your checking account. If your workplace doesn’t offer direct deposit, then deposit your paycheck into the savings account when you receive it. (This probably won’t work with an online-only bank, so you might have to set up a savings account at your local bank instead.)
- Figure Out Your Expenses. Look at your personal budget (we recommend using Personal Capital for your budget) and figure out how much money you need each month to cover all your regular costs. Obviously, if the answer to that question is every penny you make – or more – you’ll need to cut back somewhere if you want to save. Look for ways to save money, such as cutting home energy use, spending less on groceries, and finding cheap entertainment. Pare your total spending down to a level that leaves at least a bit for savings each month. You can use the Trim app to find recurring expenses that you might be able to eliminate.
- Split Up the Total. After you figure out how much you need each month for your bills, split up that total into smaller amounts that can come out of each paycheck. For instance, suppose you need $1,800 per month for all your expenses, and you get paid $500 every week. In that case, you should plan to make a $450 transfer out of your savings every week. That will leave you $50 out of every paycheck for savings – a total of $200 per month.
- Set Up Automatic Withdrawals. Set up automatic withdrawals to pull the amount you need each week from your savings into your checking account. Make sure to set up these transfers to go through a few days after your paycheck comes in. For instance, if you get paid on Friday, set up the transfer for the following Monday or Tuesday. That way, you can be sure the money will be there in your savings by the time you withdraw it, and you won’t risk a hefty bank fee for overdrawing your account.
- Monitor the Results. Over the next few months, keep track of how well your plan is meeting your needs. If you find that you’re struggling to make ends meet each month, you can bump up the amount of your weekly withdrawal to give yourself more breathing room. On the other hand, if you find that you’re spending quite a bit less than you’re putting into checking, cut back the withdrawal and let that extra money stay in savings.
- Let It Ride. Now, all you have to do is leave your savings alone to grow. You can draw on it if there’s a real emergency, but don’t dip into it when you’re a little short on cash. Instead, use the money in your checking account for all your regular expenses. If there’s any money left in that account after all your bills are paid, you can feel free to spend it with no guilt. Your savings for the month are already taken care of – safe in their own snug little nest.
Other Ways to Save Automatically
Suppose you’re going through the list above, and when you come to step 3, you hit a snag. You look at your budget every which way, and no matter how you tweak it, you can’t manage to squeeze more than a few dollars of savings out of every paycheck. With savings that small, it doesn’t even seem worth the trouble of setting up an automatic savings plan.
Well, don’t give up yet. Setting aside a lump sum out of each paycheck is one good way to make savings automatic – but it’s not the only way. There are all kinds of special apps and programs you can use to save smaller amounts here and there throughout the month. Here are some of the best apps for making automatic saving part of your routine.
1. Keep the Change
Some people save extra money by paying for everything in cash and pocketing all the coins they get in change. At the end of the day, they stash all those coins in a big jar. When the jar fills up, they take it to the bank and deposit it all in savings.
This system is simple, but it has its drawbacks. For one, a big jar on your dresser is easy to dip into if you happen to need a couple of extra bucks. Also, most banks make you count and wrap all those coins before depositing them, which is a hassle.
The Keep the Change program from Bank of America offers an easier way to save your change. To use it, you need to have both checking and savings accounts at Bank of America, as well as a debit card that’s linked to checking. When you sign up for the program, the bank starts automatically rounding up all your debit card purchases to the nearest dollar. The change goes directly into your savings account.
For instance, suppose you go to the supermarket and spend $32.34 on groceries with your debit card. The bank rounds this purchase up to $33, which comes out of your checking account. The extra $0.66 goes into savings.
That’s not a big amount – but when you multiply it by all the purchases you make in a month, it can add up quickly. And the best part is, since each roundup is so small, you don’t miss the money.
Biggest Advantage: The program is easy to use. All you have to do is buy things with your debit card and watch your savings grow.
Biggest Disadvantage: It’s only available for Bank of America customers. You also need to use a debit card, which doesn’t have the same cash back benefits of credit cards.
2. Chime®
Chime is another online bank with its own automatic savings app. It offers two different ways to save:
- Save When You Spend. This is another roundup program like Keep the Change. A Chime account comes with a Chime Visa debit card, and purchases with this card get rounded up to the nearest dollar. The excess goes from your Chime Checking Account to a separate Chime Savings account. As an added perk, Chime pays you a 10% bonus every Friday on all the money you’ve saved by rounding up. This bonus is capped at $500 per year.
- Save When You Get Paid. You can also use Chime like a regular automatic savings plan. Whenever you receive a paycheck, you can automatically have 10% of it deposited into your Chime Savings account.
Biggest Advantage: Chime gives you multiple ways to automate your savings. You can save both when you earn and when you spend. According to Chime, if you use your Chime card an average of twice a day, you can expect to save around $400 per year.
Biggest Disadvantage: The interest on Chime Savings accounts is somewhat low. Currently, it’s set at 2.00% APY*, lower than other accounts.
Chime is a financial technology company, not a bank. Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC.
*The Annual Percentage Yield (“APY”) is variable and may change at any time. The disclosed APY is accurate as of May 22, 2023. No minimum balance required. Must have $0.01 in savings to earn interest.
3. Acorns
Acorns takes automated saving to the next level. Instead of just putting your money in a savings account, the app invests it in a mix of different exchange-traded funds (ETFs).
Acorns invests in six different ETFs: large companies, small companies, government bonds, corporate bonds, real estate, and foreign stocks in developing countries. It divides up your money among these six funds based on your income, net worth, and risk tolerance.
There are several different ways to invest with Acorns:
- Rounding Up. Like other automated savings apps, Acorns can be linked to your credit card or debit card. When you make a purchase, the app rounds up the total and puts the change into your Acorns account.
- One-Time and Recurring Investments. You can transfer extra money into your Acorns account anytime you like. You can also transfer fixed sums to your Acorns account on a daily, weekly, or monthly basis.
- Found Money. Acorns isn’t just a savings app – it’s also a rewards program. It has partnerships with 25 businesses, including Apple, Hulu, Groupon, and Walmart. When you make a purchase with one of these brands using your Acorn-linked card, the company puts money into your Acorn account.
- Referrals. Finally, you can earn money by referring your friends to Acorns. Whenever a friend signs up using a special investment code sent by you, a bonus gets paid into your account. The total you can earn through Found Money and Referrals combined is $100 per year.
Biggest Advantage: Acorns offers an easy way for new investors to get started investing, even if they don’t have a lot of cash to spare.
Biggest Disadvantage: Unlike other automated savings apps, Acorns isn’t free. It charges a fee of $1 a month if your balance is under $5,000. On balances over $5,000, you pay 0.25% per year.
4. Qapital
Qapital is an online savings bank with a twist. It doesn’t pay any interest on its FDIC-insured savings accounts, but it does offer an automated savings app that you can customize to your needs.
To use the app, you link a payment card – debit or credit – to your Qapital account. Then, when you shop with this card, it can trigger a transfer to your savings. You can set your own rules for how much money you want to transfer and when.
Sample rules include:
- The Roundup Rule. This rule works like Keep the Change. Every time you make a purchase, the app rounds it up, and the extra goes to your Qapital account. This is the most popular savings rule among Qapital users. According to Qapital, the average user saves $44 a month by following it.
- The Guilty Pleasure Rule. Everyone has a guilty pleasure, like fast food or overpriced cocktails. With this rule, you put that bad habit to work for you. Whenever you indulge in your guilty pleasure, a fixed amount gets transferred to your Qapital account. Aside from the savings, this rule helps you keep track of how much you’re indulging, and maybe get the habit under better control.
- The Spend Less Rule. This rule is another way to get a handle on your spending. Say you think you’re spending too much in one particular place, like the movies or a favorite clothing store. With this rule, you set a cap on how much you want to spend at that place in a month. Then, if you manage to come in under that limit, the remainder goes to savings.
- The Set and Forget Rule. This rule is the simplest of all. You just arrange to transfer a fixed amount of money to your Qapital account on a regular basis: daily, weekly, or monthly.
- Your Own Rule. Qapital also has its own channel on IFTTT. This Web-based service measures the activity in all your other accounts, such as Facebook and Fitbit, and triggers an event when certain conditions are met. When you connect Qapital to IFTTT, you can choose to trigger a transfer based on pretty much anything. You can save when you meet a fitness goal, when you check off items on your to-do list, or even when the weather is sunny.
Biggest Advantage: Qapital is easy to tailor to your needs, so you can save whenever and however you want.
Biggest Disadvantage: All your savings go into a Qapital account that earns no interest. Right now, with interest rates for savings barely topping 1% APY, that’s not such a big deal. However, it could be if interest rates go up.
Final Word
The nicest thing about an automated savings plan is that you can “set it and forget it.” Once you have it set up, your savings takes care of itself. The only time you need to make a change to your plan is when there’s a change in your financial circumstances. For instance, if you get married or start a family, you need to readjust your savings plan to fit your new household expenses.
However, some changes don’t have to affect your plan. For example, if you get a raise at work, you don’t need to alter your plan to send that extra money to your checking account. You can just keep going on as you are and let the extra money go into your savings. After all, just because your income goes up, that doesn’t mean your expenses have to.
If that sounds like no fun to you, then you can compromise. Adjust your regular withdrawals to use some of your increased income as spending money while letting the rest of it stay in savings. That way, you can enjoy a few extra luxuries and boost your monthly savings at the same time.
Do you use an automated savings plan? If so, do you have any other tips for success?
