Should You Opt For an Automatic Savings Plan?

We know how difficult it is to stick to your saving plans. You get ready with a personal financial plan, and we give you a straightforward and practical way to hit it head-on—automatic savings plan. Does ‘automatic savings plan’ sound peculiar to you? Though we don’t use this term often in India, the idea still exists. It is better known as ‘recurring transfer’. Here is everything you need to know about an automatic savings plan!

What is an automatic savings plan?

An automatic savings plan is nothing more than a personal savings plan where an individual can set instructions on his/her savings account such that a specified amount will be automatically deducted from the account balance and transferred to a designated account in specified intervals of time. Usually, the time interval will be set at once per month, say, on the day of the salary being credited.

Most salary accounts and savings bank accounts provide this facility of setting instructions for free. All you need is another savings account where you save money that is ‘not easily accessible’. If this savings account is easily accessible, there is the risk of spending off the saved money for fulfilling short-term pleasures. However, you are going to lose the long-term benefits you may have if you had saved up money.

How to activate it?

Step 1: Open a savings account that gives you the highest interest rate even if it does not come with a debit card or net banking facility. This is because the more accessible the account is, the more ways you find to spend. Let’s call this account the ‘piggy bank’.

Step 2: Set a standing instruction on your salary account or the account you use to transact with funds. For this, you must visit your bank branch, get in touch with the customer care executive, or activate the facility over net banking/mobile banking.

Step 3: Set the amount you wish to save every month and the date of transfer based on your convenience. The target for this transfer is the piggy bank account. Also, set the time duration over which you wish to transfer this amount, such as a year or two.

You can also choose the intervals to be daily, weekly, bi-weekly, monthly, bi-monthly, or whatever you feel like based on your plan.

Step 4: Validate your instruction with your signature or OTP based on the method you have chosen to set the instruction.

Step 5: Voila! Your savings have been taken care of. Now, forget about going back every month and attempting to save money for the set period. 

Why have an automatic savings plan?

Let us list down a few factors to tell you why you should consider an automatic savings plan and how it can be fruitful in realising your financial plan.

1. It teaches the concept of ‘Pay Yourself First’

The primary financial lesson one should learn is ‘Pay Yourself First’. Though you understand the importance of the statement, you may not be able to pull yourself to reward yourself with savings as you consider it a luxury, not meant for you. Your bills might be taking up more than what you plan.

Opt for an automatic savings plan to enforce the ‘Pay Yourself First’ motto. When an automatic savings plan automatically makes recurring transfers in the intervals you have specified, you will learn to keep your cravings in check since you will have a lesser outstanding balance in your account, to begin with. 

The policy here is that you won’t be left with much if you try to save after completing all your commitments, needs, and wants. Instead, save first through an automatic savings account and then distribute the remaining balance towards obligations and requirements. This automatically reduces the amount you spend on wants. Makes sense, right?

Also Read: 4 important points to consider when investing in FD accounts

2. Keep excuses aside

All along you might be making excuses to save thinking that you ‘I am having a hard time already’, ‘if I save now, I will not have enough to carry on with the rest of the month, ‘I can’t afford to save as yet’, and whatnot! Let me tell you—life always has surprises and no money is more money. No matter how much more you earn, you will not fail to find a way to spend it and still say that ‘I cannot afford to save as yet’.

What you must decide today is that you will set aside some money, however small it is, without making excuses. Automatic savings plan does that. It keeps aside a portion of your money, as per your choice. It is useful when savings happen without you noticing and frowning about it.

3. One-time effort and done!

Procrastination can be your greatest enemy. You tell yourself to save a part of your earnings and leave it at that. However, nothing happens until you transfer the funds towards your savings account.

One way to overcome this habit of delaying or procrastination is through an automatic savings plan. Just set the instructions on your salary account or whatever, and forget about it. Your savings will be well taken care of without you bothering to transfer your savings every month. When you are lazy, you must find a smart way to take care of things that require minimum effort.

4. Financial back-up is good

Why should you even save? I am sure many young readers who have just landed a job would think this way. Life is so uncertain, and COVID-19 is only one example. Though you feel everything around you is just fine, you must be prepared for the unexpected with an emergency fund.

Did you say you have enough emergency funds? Cool! If you look for it, you can find numerous goals to save for. May it be going on a vacation post-COVID-19, downpayment for your dream house/car, or for the post-graduate course you are looking forward to. You can think of saving from now so you can get your kid a seat in that reputed school you have been eyeing on. Whatever the goal is, saving is the key!

What are the overheads associated?

• If your monthly expenditure towards your debts and domestic necessities are volatile and cannot be predicted, you may not be able to figure out how much money to keep aside for the automatic savings plan. In that case, you must choose the minimum amount for setting the plan.
• You need to keep a reminder regarding the due date of the automatic savings plan. You may think that your savings are building up automatically and forget to renew the instruction for auto-transfer.
• You have to renew your savings plan as and when there is more cash at hand so that you can reiterate the set instructions with a higher amount. Otherwise, you will have to manually transfer the additional funds that you are now able to afford to save in addition to the set amount.

Who can benefit?

• If you are someone who wishes to build-up savings consistently but has been struggling to do so, just go for this arrangement. Saving up as per your financial plan becomes much more comfortable with an automatic savings plan.
• Are you a shopaholic? Do you spend on things that are not even necessary? Do you want to change your habit and save up a little? An automatic savings plan can fix this. When you set up an amount equivalent to your unnecessary expenditure to be auto-transferred right on your payday, all that you are spending on shopping will sit in your savings account, leaving no room for spending.
• Those who have recently started earning and have no clue how to start saving can choose the automatic savings to plan to inculcate the habit of saving.
• Anybody and everybody can set up their automatic savings plan and put aside some funds that are easily accessible in the case of emergencies or to fulfil their goals.

Not just a savings account, you can choose to automate contributing to mutual funds in the form of a systematic investment plan (SIP). You can select this option when you think you are ready to enter the world of mutual funds and make some extra pennies. However, you must be prepared to take the fluctuations in the market as well. As the first step, do your research and frame a financial plan to automate contributions towards savings and investments.

For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in