Introduction
Saving money should be an important part of everyone's financial plan. But, let’s be honest, when we actually have to find the money to set aside, it can be hard to make it a priority. This is especially true when there’s nothing pressing that needs to be done such as an emergency fund. That’s why auto-savings has become popular with many money savers. It’s like a chore you do on autopilot. Deciding if your automatic savings plan is right for you is not easy and there are both pros and cons to consider before taking the plunge.
What is Automatic Savings?
Automatic savings is a technique that helps people create disciplined savings habits. It’s a way to save without having to make effort each time we want to put money aside. Automatic savings takes the human factor out of the equation and just does the job for us. Many people find it easier to save when their bank does the work for them, setting a certain amount of money aside when their paycheck is deposited and transferring it directly to a separate savings account.
The Pros
There are several benefits of automatic savings.
Convenience : The main attraction is that it's convenient. It’s super easy to set up and after the initial setup, it’ll happen each paycheck cycle. This means that you won’t have to remember to take a certain amount of money out of your paycheck every time you get paid.
Discipline : The second benefit is that it can provide you with more discipline. This is particularly helpful for people who have difficulty saving money since it takes the struggle out of the process.
Avoiding Temptation : Automatic savings can also help you reduce temptation to spend money by having it taken out of your paycheck before you even see it. This also makes it easier to save for things like retirement and long-term goals since you don’t even have to think about them or be tempted to spend the money on something else.
No Need to Negotiate : Automatic savings also saves you from the effort of trying to negotiate with yourself to save money each month. Negotiations often lose, especially if temptation is strong.
Tax Advantages : Lastly, in some cases, it may have tax advantages. Depending on the country or state you live in, you may be able to save on taxes by having money taken out of your paychecks and deposited directly into a retirement plan.
The Cons
Although there are several benefits to automatic savings, there are also some potential drawbacks that you should consider before setting up such a plan.
Lack of Flexibility : One potential issue is the lack of flexibility it may cause in your budget. Once you have the money taken out of your paycheck, it’s not available for other expenses and that can lead to issues if something unexpected comes up.
Accessibility : Another potential problem with automatic savings is that the money might not be as accessible as it would be if you just kept it in your checking or savings account. Many times the money will be invested in an account that has fees or other restrictions that might make it difficult or impossible to access it if you need it.
Higher Fees : Also, some savings accounts might have higher fees or require a minimum balance. If you don’t always have a certain amount of money in your savings account, you could end up with fees that you weren’t expecting.
Unexpected Payments : Lastly, some payment plans may also require you to pay a fee if you make a payment before the scheduled date. This could be a potential problem as you may need the money more urgently but you may not have access to it.
How to Decide if Automatic Savings is Right for You
Now that you know the pros and cons of automatic savings, it’s time to decide if an automatic savings plan is right for you. Everyone’s financial situation and needs are different, so it’s important to take the time to evaluate your own situation and come to a conclusion. Here are a few things to consider when making this decision.
Emergency Funds : First, it’s important to decide if you have an emergency fund or not. If you don’t have an emergency fund, then automatic savings may not be the best option for you since the money is typically not very accessible.
Budget : Another important consideration is your budget. If you have a tight budget and don’t have much room for error, then an automatic savings plan may not be the best decision as it’ll take money away from other required expenses each month.
Flexibility : Lastly, you should consider the amount of flexibility you need in your savings. If you know that you may need to access the money you’re saving at any time then an automatic savings plan may not be the best option since the money may not be very accessible.
Conclusion
In the end, deciding if an automatic savings plan is right for you is a personal decision that only you can make. You need to be honest with yourself about your financial situation and your needs so that you can make an informed decision. If you decide that an automatic savings plan is right for you, then you can take advantage of the convenience and discipline it offers. But, if you decide that it's not right for you, then you still have other options that can help you create saving habits. Whatever you decide, just make sure to have a plan in place and stick to it.