One of the best ways to avoid dipping your fingers into your savings (especially your emergency fund for non-emergencies) is to automate your savings accounts so that your money flows through your personal economy without much interference from you. When you automate your savings accounts, you can force yourself to practice financial discipline and work toward financial freedom.
Pay Yourself First
You can have money from your checking account automatically transferred into a savings account each month; however, you are probably better off having your paycheck deposited into your savings account, and then having the money you live on transferred into your checking account.
1. Set Up a Savings Account</b
Look for a good savings account, either in town, or online. Make sure the financial institution is FDIC insured. An online bank account can be a good choice, since it forces you to think things through before making a big purchase. Having your savings account at a different institution than your checking account can be helpful, creating another barrier to raiding your savings.
2. Set Up a Checking Account
After you have opened your savings account, build up a cushion in your checking account so that your finances can survive the lag associated with transfers between institutions.
3. Set Up the Direct Deposit
Once your checking account is squared away, go to the human resources office at your work and ask about having your paycheck deposited into your savings account. If you own your own business, have money automatically transferred from your business account into your savings account.
4. Set Up the Transfer From Savings to Checking
Once you have your direct deposit into your savings, automate further by setting up a recurring transfer so that some of the money automatically goes into your personal checking account.
If you are paid on the 1st and 15th of each month, and receive $1,500 a paycheck (after taxes, retirement, health premiums, etc.), you have that money automatically deposited into your savings account. Every 8th and 23rd of the month, you can set up an automatic transfer so that $1,200 goes into your personal checking account. This way, you live only on what is in your checking account, and you automatically bank $300 of each paycheck, leaving it in your savings.
Adjusting Your Savings System
You can, of course, adjust your savings system as needed. If you find that you have a great deal of money left over at the end of each month, you can adjust your automatic transfer so that you are keeping $400 of each account in savings. Or, if you find that you are cutting it too close for comfort, you can adjust so that your savings account is transferring more money to your personal checking.
Another thing you can do is automate your main savings account so that it sends money other places. You can have money sent to an investment account for an automatic transaction every three or four months, or send the money to other accounts for long term savings goals, short terms savings goals and even your emergency fund.
Check your main savings account every few months and consider whether you can do something else with that money to help it grow more efficiently, meeting more of your financial goals.
Things to Keep in Mind About Automated Savings
It is important to carefully consider your automated accounts. Carefully track deposits and withdrawals initially to make sure that lag doesn’t result in an overdraft situation in one (or more) of your accounts. Allow plenty of time, and build up a cushion of cash before you automate your savings accounts.
Also, make sure you understand the transfer rules. You may be limited as to the number of transfers that can be made out of your account in a month. Organize your finances so that you are well within the prescribed limits.
Finally, be aware of account minimums. If you fall below an account minimum, you may not get the full benefit of the advertised yield, or you may have to pay fees. Make sure you understand the terms of the account before opening it. Once you are satisfied that the account will work for you, then you can begin automating your finances so that your savings accounts take priority.