Automate to Reach Your Savings Goals

by on Apr 13, 2016 Categories: retirement planning, saving, investing

We’ve all heard it – Start early when it comes to planning and saving for retirement. Max out your 401k contribution. Spend less than you earn. Don’t splurge on things you really can’t afford.


While this is all sound advice, the reality is most Americans do not follow these basic financial principals. For some it’s because their income level truly doesn’t allow them to place saving as a financial priority, but for others it’s about how they prioritize their spending habits. With research showing an overwhelming percentage of Americans are not saving enough to prepare for retirement, and a vast majority don’t feel confident in their ability to retire, it’s time for those who are able to take advantage of one of the easiest savings tools available. Automation.  


Automation is beneficial to individuals who have sufficient income but whose spending habits lead them to live paycheck to paycheck and save less than they’d like each year. So, if your income covers your monthly expenses, you have a safety net of cash, and find yourself spending your remaining monthly income on non-essentials, automation may be a great help.


If this sounds like you, the first place you should consider putting automation into practice is your company 401k. You can determine a set percentage or amount to be taken pre-tax from each paycheck and deposited into your retirement account. Once you enroll in the program, these contributions are made automatically and require very limited action. Currently, you can contribute up to $18,500 per year plus your employer may match a portion of your contribution. If you’re just starting out, contribute whatever you can to your 401k and aim to increase your contributions by 1% each year until you’ve maxed out your contribution.


If you don’t have access to an employer sponsored 401k plan, an IRA would be a good choice. While there are different types of IRAs, each with their own nuances, the purpose of any IRA is tax efficient retirement savings. You can currently contribute up to $5,500 annually to an IRA using after tax dollars. Start by determining how much you can invest each month. In most cases, you can set up monthly transfers from your checking account into the IRA. Set up the transfer date within days of getting your paycheck, so the money is automatically moved to the IRA before it can be spent.


Once you’ve reached the point that you’re maxing out the tax deferred retirement vehicles, or if you need liquidity/access to funds that these accounts don’t provide, consider a standard brokerage account. This type of account allows you to invest in stocks, bonds, mutual funds or ETFs but offers no tax advantages. However, you aren’t penalized for tapping into the funds in this type of account if you need some emergency cash. Transfers from your checking account to your brokerage account can be automated on a monthly basis, allowing you to invest money and prioritize saving instead of spending just because there is money in the bank.


Automating deposits into any of these accounts is a great option for those who want to reprioritize saving over spending, a habit that is more common than you probably expect and happens across all levels of income and wealth.