Do you want to be able to save more money for your financial goals? Today, I want to show you how to make saving and investing less complicated by automating your finances, and share with you how I saved my first $250,000.
I hope this doesn’t come off as bragging, but rather to share some of the things I did to get where I am today. I was lucky enough to have just the right combinations of things going for me that I was able to achieve this significant milestone. Your result will vary depending on your income, saving options, and the ability to save.
Three Ways to Automate Your Savings
1. Automatic Investment Plan (AIP)
I started my first job in 1996 as a contract worker, so I was not able to participate in a 401(k) plan. I am not a budgeting type, so I had to find an easy way to save money — or what people commonly refer to as “pay yourself first.”
An Automatic Investment Plan through my stockbroker, Charles Schwab, was the only option.
The AIP withdraws a fixed amount of money from my cash account and buys shares of mutual funds that I selected in my investment account on a regular basis. As my paychecks get deposited in my cash account, I automatically paid myself by transferring the money into my investment account.
Basically, I automatically steal money from my cash account to fund my investment account.
2. Make 401(k) Contributions
401(k) is probably the best and most accessible automatic investment plan available.
Later, when I became a full-time employee in 1998, I was able to participate in my employer’s 401(k) program. With the 401(k) at my disposal, I was able to contribute with my pre-tax money before I even get my paychecks.
There are several distinct advantages with 401(k):
- You can invest with pre-tax dollars – this allows me to pay less taxes. I probably saved about 35 cents on each dollar I contributed.
- You don’t have to pay any tax on yearly distributions and dividends from investments inside the 401(k) plan.
- Many companies offer matching for 401(k). For example, my company matched the first 6% of my yearly contribution. This was not a huge amount, but matching is an instant 100% return on investment!
- It is very easy to rebalance your portfolio inside a 401(k) plan.
- A 401(k) plan is an automatic dollar cost averaging program, which is an excellent disciplined way to add money to your savings on a regular basis.
3. Payroll Deduction
In 1998, I bought my first house and later in 2002 refinanced it to a 15-year loan through my company’s Credit Union. To make life easy, I set up a payroll deduction to deposit money into my Credit Union’s checking account and automatically pay the mortgage each month.
If your company offers this option, this is a good way to pay yourself first and use it for investing purpose as well.
You can similarly use a Direct Deposit, but it does not offer the ability to split up your paycheck into several accounts; therefore, you need some discipline to divert your money into proper destinations.
How to Set Up Automatic Investment
Here, I am going to outline some basic steps you can take to automate your savings.
How to Set Up and Automate Your 401(k) Plan
If you have a 401(k) plan at work and you are participating, you are already in good shape.
Your account is set up to automatically deduct a percentage of your paycheck and invest it to whatever investment choices you made when you started.
If you don’t have this set up yet, follow these steps and get started today:
- Contact your HR department to see how you can get started.
- Complete the paperwork necessary.
- Allocate a percentage of your paycheck as contributions to your 401(k) plan. At the minimum, you should contribute enough to get the full company matching contribution (your HR department can also tell you what percentage this is). If you can afford to contribute more, check this maximum 401(k) contribution limit chart to determine the percentage.
- Now you have to decide what investments you’ll be buying as you add money to your plan. If you don’t know anything about investing, a safe bet is to put 100% toward a Target Retirement Fund. Otherwise, learn more about asset allocation and select your investments accordingly.
- Monitor your paycheck and 401(k) to make sure everything goes according to plan.
How to Automating Non-401(k) Investments
The best part is, no matter what account you have: 401(k), Roth 401(k), Roth IRA, 403(b)…all of them have automatic investment options.
There is no automatic deduction for IRAs, but you can set up an automatic investment plan. Ask your bank or broker about AIP, and you should be able to set up something similar to your 401(k) plan.
I recently shared how I am automatically investing $125 each week using M1 Finance. You can take a look at that article and set up something similar for yourself. Although I have a taxable account there, you can also set up an IRA with them.
If you need help with this, call customer service. They’ll be glad to take your money automatically!
How to Automate Your Savings
Another great thing to automate is saving up for financial goals.
For example, it can seem daunting to save up six months of expenses into an emergency fund. But if you break that huge goal into a monthly amount over a set period of time, it can be a lot easier to manage.
- Ask your employer if they offer direct deposit (it’s better if you can deposit directly to your account without doing anything).
- Deposit your paycheck into your checking account (either direct deposit or manually).
- Automatically transfer some amount per paycheck from your checking to your savings account. Some banks will let you set up multiple sub-accounts. This way, you can have an account for each goal and automatically move your money around.
Plus, you won’t have to think about saving for your goal; it will just happen automatically. That’s the beauty of automation.
Aside from these three primary methods, here are some additional ideas:
- Automatic Reinvestment — For all my investments, I instructed the brokerage firm to reinvest all dividend payments and yearly distributions. This way, my investments can take advantage of compounded growth.
- Credit Card Reward — I do not recommend this method if you cannot pay off your credit cards each month. I always pay my credit cards in full. I have two cashback credit cards that I primarily use. I make most of my purchases using these cards. Once I collect enough reward money, I deposit the money into my investment account.
- Tax Withholding — I do not over-withhold because I think it is silly to give the government an interest-free loan. However, over-withholding can be an option for those of us who find it hard to save money — as long as you DO save and invest your refund instead of spending it.
It took me almost ten years to save my first $250,000, and it was not easy. I lived well below my means and maxed out my 401(k) and IRA each year. I also learned my investment lessons early, so my losses were limited. Saving money and being frugal, along with a sound investment strategy, allowed me to reach this point.
I’d love to hear about some success you’ve had with automating your investments and your savings.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.