Make Saving Automatic

photo credit: Zesmerelda

Recently I wrote about David Bach’s Latte Theory. How cutting back on small things can save you money in the long run. You can read that article here.

Today I wanted to cover how you can save money automatically. This is something that David covers in his book The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich. As the title says, it’s a one-step plan. Further, it’s a simple one step-plan.
I’m going to lay out the basics of the plan here. Trust me when I say, it’s simple.

1. I’m going to assume you’ve read the article on the Latte Factor and that you’ve discovered some money that you can save.
2. What you need to do now is visit your financial institution and open two new accounts. Two new accounts you say? Whatever for? Read on and I’ll tell you.
3. The first account should be a savings account. No investments, stocks, mutual funds. Just a liquid savings account. This account will be your rainy day fund and for that reason there must be no volatility. This is the money you need when your roof leaks, when the furnace goes, or whenever some other emergency occurs. Therefore, it needs to be safe and liquid as you never know when you’ll need it. Figure out how much money you will need for a ‘rainy day’. Figure 3 to 6 months of income.
4. The second account should be an account designated towards retirement goals. In Canada (where I’m from) this would be a RSP. I’m sure that different countries have similar account types. This account should allow you to hold different types of investments; stocks, mutual funds, etc. The reason for this is you will have a longer time frame for this money. In other words you can account for some volatility within this account.
5. Now for the automatic part. Every time that you get paid have your bank transfer money into these two accounts. Different institutions will call these different things. Some with call it a pre-authorized transfer service. Others may call it a pre-authorized purchase plan. It all depends on what type of account the money is going into.
6. You already know how much extra money you have. I’m not going to get into how you should split the money between the two accounts here, that will be a discussion for another day.
7. When your rainy day fund hits the 3 to 6 months of income open a new account. Start transferring the money into this new account. This is your vacation, new car, new house, etc fund.

Fairly easy? I thought so. Just make it automatic. The more you put away, the more you will save towards your dreams and your retirement. All of this will happen without you even thinking about it. One day you’ll look at your accounts and you’ll realize that you have a nice little nest egg of money saved away. Some may call you rich, you may call yourself rich.