Automating our savings process allows us to set things up so that the saving happens automatically (e.g., as soon as our pay arrives, on a specific date every month, etc.).

Benefits

There are several reasons why automating savings is a very good idea:

• As we said earlier, it eliminates the need for us to remember to save.
• It allows us to plan to save for specific goals (e.g., for a vacation trip, to invest, to buy a car, etc.)
• It helps us create a 'save first' strategy. By scheduling the automated saving to happen as soon as we come into money, we're demonstrating to ourselves that we're serious about saving for our future.

Techniques

There are several ways to automate the saving process. We'll explore them in this article.

Via direct pay deposit

If your employer supports directly depositing your pay into your bank account, they may also allow you to select multiple accounts for the direct deposit. For example, if you would like to save 25% of your pay, you could create a 'savings' account at your bank and then instruct your employer to deposit 75% of the pay into your 'main' account and the rest 25% into your 'savings' account.

                     .----------->
                    / (75%, Main account)
                   /
                  /
  Employer -----> 
                  \
                   \
                    \
                      ----------->
                      (25%, Savings account)

Transfer between accounts within a bank

If your employer does not offer direct deposit or allows only one bank account for direct deposit, all is not lost. You could instruct your bank to transfer a portion of the money from your main account into a savings account, typically right after your employer has directly deposited your pay into your 'main' account at the bank.

You could even set up multiple such transfers — into different savings accounts for different purposes.

                           (75% stays here)
                        .--> Main account
                       /
                      / .--> Savings account 1
                     / /   (20%, for investing)
                    / /
                   / /
  Employer ------>--
  (100%)           \
                     \
                       --> Savings account 2
                       (5%, targeted spending)

Using pre-tax money

This is an indirect way of saving — by reducing our taxes.

Tax-deferred investments

Most medium to large companies allow employees to put some of their pre-tax income into tax-deferred investments via 401(k) or 403(b) schemes. The money thus invested is considered non-taxable, and thus reduces the taxable salary by that much amount. (For example, if, out of your salary of $10,000 you decide to invest $1,000 into a tax-deferred investment, your taxable salary is now considered $9,000.)

Some employers even match employees' contributions (i.e., add a little bit of the company's money), up to a limit. This is definitely something to consider.

Note: before enrolling in your company's 401(k) or similar plans, discuss with your financial advisor / tax planner to determine if such tax-deferred investments are suitable for you. Typically, the money needs to stay invested until the person is over sixty years old and any income from the investments are taxable when we do withdraw them. (That's why such investments are termed tax-deferred.)

Pre-tax health savings accounts (FSA and HSA)

Some employer-provided health plans allow us to set aside some amount from our salary to pay for 'out of pocket' health expenses that are typically not covered by insurance. Such schemes fall under health savings accounts (HSA) or flexible savings accounts (FSA). The amount set aside will be from our pre-tax salary, thus reducing our taxable income.

FSA and HSA are similar, but also slightly different enough to feel complicated:

• If you typically do not incur health expenditure beyond what is covered by your insurance, these may not be that useful.
• Some plans allow you to augment your contribution using your after-tax money, while others don't.
• Some plans allow you to 'roll over' any unspent amount to the next year, while others don't (i.e., you 'use it or lose it').
• Some plans allow unspent amounts to be invested in a qualified investment (and earn profits tax-free), while some don't.

Before signing up, study the literature and consult with your financial advisor to understand if these schemes make sense for you.

Commuter benefits

If you use public transport to travel between our home and workplace, yet another way to reduce your taxable income (by a small amount) is to see if your employer offers commuter benefits. This, in principle, is similar to HSA — you pay for your commute expenses out of your pre-tax income, thus reducing our taxable income.

Automatic savings/investments plans

We learned about employer-provided tax-deferred investments. Just as an employer 'withdraws' a specific amount from our pre-tax paycheck every pay period and invests it in specific investments, some apps (and investment companies) allow us to link our bank account with them so that every month they (the app or investment company) automatically withdraw a certain amount from our bank account and invest it for us. The main difference is that the money is from our after-tax bank account, which means that it doesn't have the tax-deferred advantage that the employer-provided 401(k) scheme has.

Summary

We saw that there are several ways to automate money-saving techniques. Automating the repetitive steps is a easy way to insulate our savings strategy from our memory lapses or other stresses due to our busy lives.