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Wednesday, September 1, 2021


When You Should - And Shouldn't - Automate Savings to Boost Results

By: Ryan Derousseau


Deciding to take ownership over your retirement and savings goals typically starts with one important step: Automation.

Financial experts and voices almost universally begin the savings process with the idea of automation. Why? Because it allows you to move money into either short-term savings or long-term retirement accounts without ever seeing the funds within your checking. This sidesteps the biggest mistake from new savers: spending money on other items as soon as you receive the paycheck.

Automation also becomes one of the most important tools to super-charge your retirement savings goals, whether you’re looking to step away from the job at a standard age or seeking to retire early. For those wanting financial independence (FI) or to FIRE (financial independence, retire early), automating as much of the savings process as possible can protect you from accidentally (or not) splurging on something more short-term.

The power of automation in retirement has even gotten the attention of Congress. It’s considering a proposal that would require employers that offer a 401(k) to automatically enroll employees into a plan, with a minimum 3% deferral. It would also include a yearly automated hike in the deferral, until it reaches 10%.

While automation matters, though, for some it can also set back their savings goals – or it becomes unimportant to the process. Here’s where you should, as well as when you maybe shouldn’t, automate your savings.


Getting Started? Then Automate

Part of upping your savings goals includes protecting yourself from yourself. It also helps develop strong habits.

For those that have only started to begin their FI journey, then automation can provide the steppingstone to make these first steps last a lifetime. If your first step is to build an emergency fund, then you can set up your paycheck with your employer so it will send a certain portion of the money to your checking account and a certain portion to your savings. If your employer doesn’t have this option, then your bank can also process this shift of funds automatically.

If, instead, you want to pay down debt, then you can have a portion of the paycheck removed as soon as it hits your checking account and sent to the debt payment. This ensures the debt repayment takes ownership over other spending needs.

Starting your retirement savings automation looks very similar. Again, ask your employer to automatically take the part of the paycheck that you can set aside for your 401(k) or 403(b). If you have an individual retirement account (IRA) or Roth IRA, then you can also have that money automatically taken out of your checking account as soon as your paycheck hits.

By starting with what you can save – and setting it aside automatically – you’ll get these efforts started. By also automating how much you save each year, by increasing the percentage that you set aside for contributions, then you can also move closer to maxing out your 401k or IRA. 


Watch Out for Pitfalls

While automating the savings and retirement contributions helps to simplify the monthly savings strategy, you also must take a few precautions before doing so. You want to make sure that the accounts you move money into have the proper designs that will maximize your savings efforts before you automate.

First, make sure that you have checked the interest rate on your savings account. With interest rates very low, it’s difficult to find a savings account that will provide safety, easy access to cash and a strong interest rate. But you still want to make sure you have the money for an emergency fund sitting in a high interest savings account. You won’t use the funds unless something unexpected comes along, but you can still make money from it as you wait.

For your retirement accounts, make sure you have the money going to funds that represent your investing strategy. If you want lower risk vehicles, like broad market or bond index funds, you want to ensure the 401k has been set up and invested in those types of investments. If you want international exposure, again make sure the automated money goes to buy the right fund within the 401k account. If it doesn’t, then you might fail to diversify your retirement savings, leading to bigger swings when the market tumbles.

Finally, make sure the retirement funds are invested in low-fee vehicles. You don’t want to automate the investing process only to discover years later that your investments charge larger fees than you expect. This can cut into returns, reducing your ability to save as fast as you hope for retirement.


When to Turn Off Automation

Automation can set new savers or those paying down debt for the first time on the path to success. But as you become more accustomed to the idea or the more extreme your goals, the less you may want or need to rely on automation.

The FIRE movement is filled with stories of people making regular incomes and paying down large chunks of debt – say $50,000 in student loans – in a year. To achieve such a result, you can’t rely on automation. Instead, at the end or beginning of each month (depending on how the person budgets), someone trying to reach a large goal will push every extra dime towards it. Some months you might pay $2,000 towards the loan. Others, maybe $3,500 or more. It just depends on what comes in. But because you have grown accustomed to saving, you don’t see the extra money as a spending tool. You’ve instead automated your response, sending the money to the debt.

The same works in retirement accounts. Automating a 401(k) or IRA works well because there’s a max amount you can invest each year. But once people reach those marks then they often add additional investments through brokerage accounts. For someone wanting to retire by the time they reach 40, then at this point you can automate the brokerage investments. Or you can push as much as possible each month into the account.

When you have reached that level of control in your savings, it doesn’t feel like a difficult task. Instead, it can be motivating, which creates its own form of automation as well.





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