In his book “Psychology of Money,” award-wining author Morgan Housel shares that a critical practice that helped him build wealth was increasing his “savings rate.” This refers to the percentage of disposable income you can save rather than spending it.
Boosting your savings rate will empower you to achieve your financial goals faster, whether that’s buying a home, saving for retirement, or going on vacation. Of course, one of the best ways to save more is to let technology do the job. Here are some ideas on how to get started with automating your savings.
Automate Your Emergency Fund
The first step is to build an emergency fund—it allows you to sleep at night with ease and is accessible at all times in case of contingencies. The ideal amount to put into your emergency fund is 12 months of living expenses, which would cover events such as job losses or an unprecedented event like the pandemic with enough recovery time. You can save your emergency fund in the form of a liquid mutual fund, a credit union, or a savings account. Automating a fixed amount that goes in every month will ensure that you build it fast.
Automate Tax-Advantaged Savings Accounts
While building up your emergency fund, you can also automate your savings via tax-advantaged accounts such as 401(k) or 403(b) plans, which are offered by employers. This is easily available money for two reasons: one, your employer will match your contribution. Secondly, there is no tax penalty if you stay invested up to a pre-designated age. Max it out every year and get a headstart on your retirement plan.
In case your company does not offer a plan, or you are self-employed, you can also open a tax-deductible IRA (Individual Retirement Account), Roth IRA, or SEP IRA. These are taxed at your regular income slab only during withdrawal. All payments can be automated so that the money never hits your regular account, thus reducing the temptation to use it.
Automate Your Spending Life
Another great habit of automating is tracking your income and expenditure. From writing it manually in a book to typing in spreadsheets, you can now download budgeting and tracking apps that do all the work. They help you create a monthly budget, allocate an amount for fixed expenses and track overspending. Over time, such apps throw up enough data to help you analyze spending patterns that shed light on lifestyle habits, vices, and areas where you can make a shift. For instance, if you’re spending money on streaming platforms without using them, you can cancel the subscription and redirect this expenditure to your savings plan.
Automate Your Investments
Now that your basic savings are set up, it’s time to start investing. A great way to get started is to identify a mutual fund such as an index fund, which has a low expense ratio (fees charged by the fund), and automate a monthly Systematic Investment Plan (SIP). Ensure that the amount is debited as soon as your paycheck hits your savings account. As you become a more confident investor and saver, you can explore other investment instruments such as equity mutual funds, treasury bonds, and the stock market.
Today, you can automate practically every activity under the sun—building emergency funds and tax-advantaged accounts as well as tracking spending and investments. Automating savings frees up bandwidth for other activities. These can include improving your financial knowledge, exploring ways to increase your income, and analyzing your spending habits so you can live a high-quality lifestyle.
As automation becomes a habit, the results of these steps will soon start reflecting in your net worth, and you will find every step worth the change. To learn more about how to take control of your financial situation, contact Briteside Solutions today!