Why People Use Automated Savings Plans
- Saving money can be difficult, especially when a large portion of income goes towards expenses.
- To help make saving money easier, some banks have an “automated savings plan,” which allows consumers to save money by automatically transferring a set amount regularly.
- This type of saving method may not be suitable for everyone, so below is an alternative approach to saving one can take.
When payday comes, many bills and other expenses are typically paid off before any other spending occurs. Therefore, creating savings goals and achieving them can become challenging when money is constantly spent. Fortunately, one of the products and services that consumers can access via their online banking platform to help combat this issue is called an “Automated Savings Plan.”
What is an Automated Savings Plan?
An automatic savings plan is a service provided by financial institutions that allow their customers to automatically transfer money between their savings and checking accounts at a bank. Instead of manually depositing or transferring money between accounts, this savings program allows consumers to set up a recurring transfer of funds between their bank accounts.
Why do People Set Up An Automated Savings Plan?
People set up an automatic savings plan mainly to save money and achieve their financial goals. In theory, saving money is simple, but in reality, there will be instances that prevent one from transferring money into their savings account. Thus, people use this plan to switch money into another account automatically, so they are not tempted to spend it in the future.
If you wish to set up an automated savings plan for yourself, reach out to a financial advisor at your local financial institution. They can walk you through the steps to get started.
Main Benefit of Having an Automated Savings Plan
Out of Sight, Out of Mind.
One psychological issue many faces with money is they leave it up to their free will to utilize money wisely. However, this technique does not always result in the most efficient use of funds, as humans are subject to mistakes. Therefore, the funds may be used for a spontaneous purchase instead of manually transferring money into another account.
However, by setting up a recurring automatic deposit, a set amount of money will be set aside after each payday to ensure that over time, the interest rates of the savings account will make the savings account balance rise. This way, if a purchase is made, the money spent was from the amount assigned to personal expenses, not savings.
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Main Disadvantage of an Automated Savings Plan
Although an automated savings plan is very beneficial for long-term financial success, there is one main issue that arises from this service that could cause more harm than good.
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Over Saving Can Cause Overdrafts
Although the initial goal is to set up automatic deposits into a savings account, the amount chosen to transfer is crucial in this process. For example, suppose that you pay off your bills and are left with $30 in your checking account, and the automatic deposit amount is $50.
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If there are insufficient funds to transfer funds into a high-yield savings account, two possible outcomes could occur. The first scenario results in no automatic deposit until the checking balance exceeds the automatic deposit amount. The second situation leads to overdraft fees when the automatic deposit causes the checking balance to be negative.
According to ValuePenguin, every time an overdraft protection incident takes place, the customer will pay an average fee of $35. Therefore, as this fee will, over time, significantly impact the amount of money saved, it is crucial to set the automatic deposit amount to an amount that will not cause an overdraft incident.
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In the case of automatic deposits, it is better to under-save than over-save, as when an excessive amount of money is saved, it could cause more drawbacks than benefits.
Other Ways to Achieve Financial Goals
As everyone has different intentions regarding their money, the automated saving plan is unsuitable for everyone’s financial goals. However, an alternate money-saving technique below has proven to help people retain a more significant portion of their income.
Keep Track of Revenue and Expenses
No one can remember all of the transactions they made throughout a month, and when a person makes many purchases, big or small, it can slowly add up to a significant amount that a person could have used more wisely. Therefore, keep the receipts when buying and put all transactions into a spreadsheet. The spreadsheet will help determine how much money was spent on wants and needs, and if the wants expenses are an excessive amount, then they need to be reduced.
Wants are the expenses that allow a person to enjoy their life. Some examples are having a Netflix subscription or going out with friends. Although spending money to create memories makes life enjoyable, it could have long-term negative financial repercussions if done excessively. Therefore, reducing the amount of ‘wants’ expenses is essential to ensure more money is left over for long-term wealth.
Needs refer to expenses and costs that must be covered for survival. Unfortunately, there are some instances where the amount a person pays for basic living necessities cannot be lowered. Therefore, these necessary costs must be paid off before making any other purchase/acquisition.
The Money Wrap-Up
Everyone has different approaches regarding how to allocate their money. Some prefer to be passive and have automation deal with transferring money between their accounts. Others may prefer a hands-on approach and be more manual when determining how to utilize their money best. At the end of the day, the approach used is irrelevant; the only thing that matters is saving, investing, and creating generational wealth.