Editor’s Note: This post was originally posted right after New Year’s Day
If you take only one financial step this year, you can make it a powerful one by setting up an automatic savings plan.
In his book, The Automatic Millionaire, author David Bach considers this a secret to getting rich. After witnessing how it has enriched my clients’ financial well being and even my own finances, I have to agree.
An automatic savings plan is simply where you set up a method for money to automatically be deposited into a savings or investment account on a regular basis. The deposit should ideally not require any further action by you once it is set up. It will be made electronically on an automatic basis.
After the plan is set it, you should consider the account off-limits. In fact, you should do your best to simply forget that it is even possible to make a withdrawal from your savings or investment account. The more trouble it is to make a withdrawal the better. If it is an investment account, do not add a “telephone withdrawal” feature. If it is a savings account, set it up in an out-of-town bank, or any bank that takes some time and trouble to get to.
Once you have set up a method for the money to be transferred regularly to a savings or other investment account, some magic begins to happen.
First, the pain of having a little less money to immediately spend begins to fade and you find that you have simply adjusted and likely do not even miss the money. This one will really surprise you. If you are like me, you will be shocked that you could adjust to a little less money each week.
Next, the account begins to build. Not fast, but after a few months you suddenly realize that you now actually have an emergency savings account and you no longer have to be afraid of what would happen if, say, you were unable to work for a week.
As the months turn into a year, the savings quietly and without any effort on your part continues to grow. You now realize that it really may be possible to do some of the things you’ve been dreaming about – like save enough for a down payment on a house, or to finish your college degree and change careers.
As you learn the discipline of regular savings, it becomes natural. When you get a raise, a bonus, or some unexpected income, your first thought is ‘how much of it should I save?’ and not ‘whoo boy!! Party! New shoes! Dinner out!’
Do not let a tight budget stop you from learning this habit. At first, it is not the dollar amount, but the discipline of setting up the process, letting it continue, and keeping your hands off the savings account that is important.
I remember that years ago, when I first set up an automatic investment account, I had $5.00 deposited from each paycheck into a savings account. At the time, I wasn’t sure I’d be able to afford it. After a month or so, I didn’t even miss it.
A year or so later, I got a large (for me) bonus at work. I decided to invest in a mutual fund with most of the bonus money, mostly because I now had the experience of knowing that the pain of parting with the money would soon pass and that I would survive (and thrive).
Over the years, I increased the automatic savings and also started an automatic monthly investment into my mutual fund. I slowly added other automatic investments. I did not worry if the starting amounts were small. I worried about maintaining a regular habit of saving and investing. Those habits made a huge difference in my financial health today.
There are many ways you can set up an automatic investment and I highly recommend that you pick one and get started … even if you can only part with $5.00 or $10.00 and even if it is painful to part with those dollars.
Try one of these:
1. If your employer offers such a program, have your employer automatically deposit from your paycheck to your savings account.
2. Set up an automatic transfer from your checking account to your savings account.
3. Set up an automatic transfer from your checking account to a brokerage account. There are many brokerage firms that accept and encourage small automatic investments … try researching Fidelity, E*Trade, American Century, ING Direct, ShareBuilder, and many, many more. (Note this is not a recommendation or endorsement of any of these firms, just a list for you to start researching on your own.)
4. Join your employer’s 401(k) (or similar) plan and have an amount invested with each paycheck. This one often carries a bonus: you will immediately double your money if your employer offers a matching investment plan.
5. If your employer does not offer an automatic savings plan, then pick your dollar amount and each time you deposit or cash your paycheck, be certain that this amount goes into your savings account.
6. If none of the above are feasible, then get a jar, cut a coin and bill sized opening in the lid, then glue the lid on the jar. Now decide on a dollar amount, and a set day and time of the week to make your automatic investment. For example, you may choose to put $5.00 in the jar every Friday at 5:30. Then do it.
It is not rocket science. It’s discipline. And the more financial discipline you learn, the richer you will become.
Now that’s a nice way to begin the new year. And that’s The Fat Dollar way.
Here’s to your growing wealth. Happy New Year!
Jar of Money — Image by © Royalty-Free/Corbis