Should You Automate Your Savings? Pros and Cons to Consider First.
Saving money can sometimes feel like a challenge. But building financial security doesn't have to be complicated.
By automating your savings, you can effortlessly grow your nest egg without thinking too much about it. However, if you’re going to put your savings on autopilot, it’s important to do it the right way.
What does it mean to automate savings?
Automating your savings means setting up a system where a portion of your income is regularly transferred to a savings account or investment account without any manual effort on your part. For example, you could have your employer direct a percentage of your paycheck to your retirement account. Or you could set up a monthly transfer from your checking account to your savings account.
And considering that some savings accounts still offer interest rates as high as 5% (or even more in some cases), you want to make sure you’re making regular deposits to your account and taking advantage of that compound interest.
What is the benefit of automating your savings account contributions?
Automating your savings has a few major advantages.
You never miss a savings contribution
This “set it and forget it” approach to saving money allows your balance to grow in the background without having to manually make deposits into your account on a regular basis. Not only does this ensure that you don’t forget to save, but also removes the temptation to spend money that should be allocated toward savings.
You could earn a higher interest rate
Some banks and credit unions offer a higher interest rate to account holders who opt into direct debit or deposit a certain amount of money into their savings account each month.
SoFi, for example, offers 4.50% APY on savings account balances for customers who enroll in direct debit; those who don’t qualify for a maximum APY of 1.20%. Meanwhile, LendingClub's LevelUp Savings account offers 5.30% APY when you deposit a minimum of $250 each month, but missing a month will result in an APY of 4.80%.
By setting up automatic deposits into your account, you’ll ensure that you always qualify for the highest possible rate on your savings balance.
Drawbacks of automating your savings
It’s possible to be too hands-off with your savings. When your mind isn’t on your money, you could miss out on opportunities to earn better savings rates or get stuck in a savings strategy that may not work for you anymore.
For example, the Federal Reserve recently cut the federal funds rate, which means savings account rates are starting to fall. That great interest rate you were offered when you first opened your account may not be so competitive anymore; it might be time to research the best savings accounts available now and potentially switch banks.
Also, as your financial situation evolves, it’s important to adjust your savings strategy accordingly. Maybe you recently got a raise and have more disposable income. Or perhaps you took out a new loan and your monthly budget is a little tighter. In these types of situations, it’s a good idea to reevaluate your savings contributions and adjust them as needed.
How to automate your savings
There are a few different ways you can go about automating your savings.
● Set up automatic transfers: Most financial institutions allow account holders to set up automatic transfers between their accounts. This can be done by logging into your bank account online and adjusting your account settings, selecting auto withdrawals, and specifying how much you want deposited into your savings account and how often.
● Use direct deposit: Your employer may offer the option to adjust your direct deposit and have a portion of your paycheck deposited straight into your savings, investment, or retirement account.
Remember: Automating your savings isn't the same thing as putting your finances on the back burner. If you are going to take the more hands-off approach, make sure you're setting up some time to periodically revisit your savings contributions and make adjustments as needed to stay on track toward your savings goals.
Original Article: "Should you automate your savings? Pros and cons to consider first.", Yahoo!Finance