Out With The Old, In With The New: Start an Automatic Savings Plan

Throughout the month of December, Money360 is posting a daily series focusing on specific activities you can do right now to set the stage for a great 2011. Out with the old, in with the new.

30. Start an automatic savings plan to bank that money.

Yesterday, we discussed how to calculate exactly how much you’re saving per paycheck thanks to the positive changes you’ve made in your life. Today, we’ll talk about how to turn that number into something real in your life.

You have that number in hand. You know that dollar amount you’ve calculated represents the real savings going forward in your life. Now it’s time to do something with it.

First, were you able to make ends meet in your life before you made any changes? Ideally, the answer to that question was yes, but I know that in truth, for many people, the answer was no. I’ve received notes from many people over the years that were slowly drowning in debt even though they were largely making very positive personal finance choices.

If you were not making ends meet before, just sit tight and see if you can make ends meet now that you’ve made these positive changes. Stick to the good choices you were already making and find out if you have enough now to handle the ins and outs of your life and the small emergencies that life brings.

On the other hand, if you were making ends meet, then these changes just added some additional buffer to your life. Put that buffer to use by setting up an automatic savings plan to build an emergency fund and to save for future large purchases, such as a car or a house.

It’s actually pretty easy to do this. Just set up a savings account at a different bank than the one you currently have (so it’s a bit less convenient to just pull the money out for frivolous use – a passive barrier). Once it’s set up, put an automatic transfer in place that transfers the amount you calculated into the new savings account at the frequency you calculated. Just your new bank and they’ll happily help you out with this.

What you’re doing is directly taking the money you’re saving due to the positive changes in your life and putting it elsewhere so that it can accumulate.

Why?

The first reason to let it accumulate is for an emergency fund. An emergency fund is a backup pool of cash that makes it possible for you to deal with things like a car repair or a “between jobs” period without dipping into debt. I usually recommend that a person have two months’ worth of living expenses in their savings for each dependent that they have on their taxes. Yes, that means for my family, I need ten months’ of living expenses (and I have that).

If you have your emergency fund in place, save for big purchases, like a replacement automobile. The ability to pay cash for an automobile, for example, has a transformative effect on your finances as a whole. You no longer have car payments. You no longer are paying interest on that loan – instead, the interest is building up in your favor in your savings account. The same is true for any major purchase that you make from your savings account instead of from loans – appliances, home improvements, even home purchases.

This effect won’t be immediate. Don’t lose patience with it. I usually encourage people to start with it and then simply forget about it for a year or two. Let it build quietly in that account, then when you actually need it for something significant in your life, tap the money. Make a huge down payment on your car. Cover that whole car repair without going into debt. Survive through a month or four without a job. When these moments come, you will be extremely glad to have these savings because those savings will truly change your life.

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