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Automated Saving and Investing: Your Goal’s Best Friend

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Fact: we lead very busy lives. We each have an unbelievable number of tasks to accomplish on any given day. There are two primary lists: the must-do-today list and the hope-to-do-today list. Chances are that moving money from checking to savings or from savings to your investment account is on the hope-to-do-today list. It’s not a big problem if it doesn’t happen…right?

Missing a month of contributions isn’t going to make or break your financial life. But what about month after month, year after year? It adds up to a tremendous amount of lost opportunities (and dollars).

Happily, you can fix this problem with a very simple solution: automate your saving and investing activities.

Let’s think about one of the most effective examples of the success of this strategy: your employer’s 401k or similar plan. Funds are automatically deducted from your paycheck. Your excellent decision to enroll in your employer’s plan then leads to year after year of saving that you don’t have to think about.

Why not apply the tool to your other goals? For example:

  • Saving for a new car? Send a fixed monthly amount from your checking account to a high yield savings account set aside for the future purchase.
  • Saving for college? Work with a financial planner to understand how much you may need to save to eventually support your desired amount for your child’s education, then automate the contribution to the appropriate savings tool.
  • Saving for retirement? Consider using the auto-escalation option if your employer’s plan offers it. Each year, your contribution automatically increases by a percent. If you’re saving into an IRA or a Roth IRA, schedule monthly or biweekly contributions to line-up seamlessly with your paycheck.

In their aptly entitled book, “Nudge,” Nobel laureate Richard Thaler and co-author Cass Sunstein refer to this sort of trickery as a “nudge.” As they describe it, nudges should not replace your free will; they should just make it easier for you to make your own best choices.

We’ve long known about putting your personal saving habits on auto-pilot. In 1926, when George Clason first published his timeless classic “The Richest Man in Babylon,” he described this as learning to “pay yourself first.” By forming lifelong “pay yourself first” habits, you can replicate within your personal accounts the same saving success found in the employer-sponsored retirement plan world.

This strategy is just as effective today as it was nearly 100 years ago. It works for all dollar amounts and all types of saving and investing goals. Don’t put this task on your hope-to-do list. Put it on your must-do list. It only takes a few minutes, but it pays off richly.

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