Automate your Savings: A Simple First Step to Wealth
As we approach a new year and resolve to improve our personal finances, it is worth revisiting a valuable approach to building wealth. Building savings is a prerequisite to investing and growing wealth, over time. Like oxygen, we need a continuous supply of savings to breathe life into growing wealthier. Savings fuel investments. Investment returns, in turn, fuel wealth creation.
Automating savings is known to be one of, if not the simplest first step, in shaping healthy financial habits. It basically involves you setting aside a certain percentage of each pay-check or direct deposit that you receive. Each time you get paid, you set aside a portion for investment purposes. You can either do this manually, each time you get paid, by transferring funds from say your checking account to a designated savings account. This might make sense for those who are self-employed or on commission, where there may not be a set pay period calendar. For those salaried or hourly employees, arrange through your bank to have a fixed dollar sum automatically transferred to a savings account, on the same or next day as you get paid. This assumes you get paid on a fixed pay period schedule.
Traditionally, financial experts have advised audiences to set aside at least 10% of the net pay they get. In the current ultra-low deposit/interest rate world we live in today, I’d suggest that number should be much higher. For example, saving at least 15–20% of one’s net pay might be more advisable. That is because, with very low or near-zero deposit rates being paid on money you hold with your financial institution (i.e. bank or credit union), your money just doesn’t work for you the way it once did. Older people will fondly remember banks paying them high single-digit or low double-digit interest rates on their savings accounts. It was a nice “risk free” way to get a reasonable yield and to generate some passive income. But that was a long time ago. And who knows if we will see such rates again.
To be successful with growing wealth with automated savings, you have to be disciplined with how you manage the set-aside savings. You want the allocated savings to be set-aside in a very specific “bucket” or account, that will not be treated as a slush fund or checking account. These savings are NOT for future consumption on things like consumer goods, cars or trips. These savings are NOT for fun money. It’s for making smart investments. You want the savings to build-up over time. And it is from the built-up savings that you will draw upon to make prudent wealth-generating investments. Personally, I like to have a dedicated savings bucket for an emergency fund and another that is in place to draw upon to make investments. The latter bucket is essentially the cash component of my investment portfolio.
Set-up an automatic savings plan today. It is a tried, tested and true way of getting yourself on a productive financial pathway. The beauty of this approach is its simplicity. Once you set it, you can forget it. It will run on auto-pilot in the background of your busy day-to-day life. It will be one less thing that you have to think about. At the same time, it will give you peace of mind, knowing you’re moving closer to your financial goals. Your wealthier future self will thank you.