It took me years to save up my first $10,000. I still remember the day my bank account had more than $10,000 in it. That first $10,000 was hard, but the next $10,000 I saved became easier, and the next $10,000 after that, I didn’t even have to think about. The simple but powerful way to build your savings is to automate it so you don’t have to manually move money across accounts with each paycheck. Manually moving money takes willpower, something that can be hard to overcome when there are so many ways that you can impulsively spend your money today or so many other fun things to do (like check Facebook or watch Games of Thrones) than to set up a retirement account. One study found that when employers automatically enrolled their employees in a 401(k) (while still allowing them to opt-out), the employee’s contribution rate went up. When you consider the fact that some people weren’t even contributing up to the amount that their employers were matching (which is like getting 100% return on your money with very low risk, if any), this automation stuff is pretty powerful.
Here’s how I automate my savings:
1. Before my paycheck even hits my checking account, $692 has been automatically deducted to go towards my TSP (401(k) equivalent for federal employees). $692 x 26 pay periods = $18,000 (the max contribution limit for TSPs and 401(k) for 2017).
2. On pay day, my paycheck automatically gets deposited into my checking account.
3. The day after my paycheck gets deposited into my checking account–
- $211 automatically gets withdrawn and invested into my Roth IRA through Vanguard (I use the “Automatic Investing” feature on their website). $211 x 26 = $5,500, the max contribution limit for Roth IRAs for 2017.
- Another $1,000 automatically gets withdrawn and invested in my taxable account (also through Vanguard).
- Another $500 automatically gets transferred to my savings account (I use American Express Personal Savings for 0.90% APY). Occasionally, if there is a good offer out on CDs, I’ll transfer money from my savings account to buy CDs.
- The rest goes to pay bills. Whatever I don’t use up by the next pay check gets manually transferred to my savings account. (I don’t worry too much about this manual transfer though, and sometimes don’t get to it for a few weeks.)
It took me over a decade to get to this point, so don’t get discouraged if your savings rate is not as high as mine. Don’t compare the beginning of your journey to someone else’s middle. The important thing is to start, however small, and make it a habit. You should view saving money like training for a marathon. If you’re training for your first marathon ever, you’d want to start off running a mile, then you add another mile, then another, until you work your way up to 26.2 miles. Similarly, with saving, you’d want to start off with a number that you can comfortably live with, then slowly challenge yourself to increase your savings rate over time.
Do you currently automate your finances?