Common advice: Set up an automatic transfer to send money to a savings account to “save money”.
Controversial opinion: Moving money between accounts is not “saving money” and automation is a poor substitute for building financial discipline.
“Saving” defined
According to Investopedia.com, “Savings” refers to the amount left over after an individual’s consumer spending is subtracted from the amount of disposable income earned in a given period of time. (Note that it is calculated based on income and spending and doesn’t say anything about where it is stored like Checking or Savings accounts).
An example of saving is deciding to buy an $8000 car instead of a $30,000 car, therefore “SAVING” $22,000.
Have I ever automated savings?
This is one of the few tips to “save money” that is very common that I didn’t use to pay off debt or save an emergency fund. Looking back, I didn’t automate any savings until our net worth was already close to $400,000 and I had set up a high yield savings account so I set up a portion of my paycheck to automatically be transferred there.
The 2 problems with relying on “Salvation by Automation”
Problem #1: Raiding
The biggest problem with relying on what I call “Salvation by Automation” is that you can just as easily transfer the money back out of the savings account and then spend it. Over the years I have seen people over and over again save a little money then raid it, save it, raid it, save it, raid it, over and over again and they never actually get a full emergency fund saved. I haven’t ever seen someone not raid their savings just because it was in a different account.
Even retirement accounts aren’t safe from raiding. THIS Magnify Money survey (by Lending Tree) found that 52% of Americans have tapped their retirement accounts before retirement age for non-retirement purposes.
Problem #2: Ignoring the lack of financial discipline
“If I have money in my account, I’ll spend it.”
Why can’t you have money in your account and not spend it? This is a discipline issue and should be addressed, not ignored. By ignoring this and relying on automation, you won’t ever build the discipline of keeping your hands off your money. I believe that keeping your hands off money is a skill, a skill that must be learned and a skill that requires practice.
It’s just like lifting weights, if you never lift anything heavy, if you never put stress on your muscles, you can’t build muscle. You have to be able to have $1000, and not spend it, have $1500, and not spend it, have $2000 and not spend it…
This is my advice because it is exactly what I did and it worked for me. I had $12,000 in my checking account and $100 in my savings account (the bare minimum required to get the free checking package) before I even started putting money in a savings account. Of the $12,000, $10,000 of it I had earmarked as “emergency funds” and $2000 was “spendable money” if I needed it.
Storing my emergency fund in my checking account meant that every time I looked at my bank balance, I had to remember and account for the emergency fund amount. This helped me to disassociate my bank balance from “available spending money”. While yes, we need to actually have money before we spend it, we shouldn’t be spending money just BECAUSE we have money in our account.
I always tell myself and my husband:
“Having money isn’t a reason to spend money”.
Because by that logic of “having money = spendable money”, we could justify spending ALL our money. And sadly, that’s exactly what most people do.
Purchase decisions should be made on affordability and the value that the purchase will provide to us. We should not be buying things just because we have money in our account because that is a recipe for thoughtless, non-intentional spending.
Is it safe to keep that much in checking?
Keeping all your money in one account is riskier for identity theft. I’ve always kept a couple hundred dollars in cash in case anything happened to my bank accounts. I know it is an old school approach but it would cover me in case it took the bank a few days to figure out and fix any identity theft issues. I have had on one or two occasions an issue with my bank debit card information getting swiped fraudulently and every time the bank has worked it out quickly.
What if I’m already financially disciplined, isn’t it just easier to automate?
Yes. If you are already very financially disciplined, then I think it is great to automate as much as you can about your finances. Just don’t try to use Salvation by Automation as a SUBSTITUTE to fixing your discipline issues or to make you feel like you are doing something when you really aren’t doing anything except moving money around.
In Summary
It is difficult to build the discipline to have money and not spend it. It takes effort and practice but it can be done.
I know it is tempting to try to take the easy way out. I know it is easier to ignore our issues with discipline. But at the end of the day, addressing and resolving these issues is the ONLY way to actually save more money.
FOR DISCUSSION:
-Have you automated your savings?
-Are you guilty of raiding your savings?