We all know how tempting it can be to spend hard-earned money on immediate desires and everyday expenses.
But what if there were simple “forced saving” techniques that could help you automate your savings and investments, making it easier to build wealth over time?
You may have heard that you should “pay yourself first” or “prioritize investing” before, the idea being you should place your wealth building activities above your day to day expenses.
One of the best strategies you can implement is a forced savings strategy – which are automations you can set up to ensure that you are setting aside money to save or invest before you’re able to do anything else with it.
These strategies can be an excellent way to get started if you are somebody who has found it difficult to get into the habit of saving. Here are 7 forced savings mechanisms that you can start today to help you get going!
1. Automatic Paycheck Transfer To An Investment Account
Whether you realize it or not, many employers offer the option to split your paycheck between multiple accounts, such as your checking account and a separate investment or savings account.
By taking advantage of this feature, you can designate a specific percentage or amount to be automatically deposited into your investment account before the money even hits your main checking account.
Everybody’s situation is different, but you should aim to automatically invest an amount that makes you slightly uncomfortable – because odds are you can make it work and pushing your perceived limits will help you grow! If you have no idea where to start, aim to transfer 10-20% of your paycheck to an investment account, or at least a high yield savings account.
This is one of the best and easiest ways to make a habit of paying yourself first. By allocating a portion of your paycheck directly to your investment account, you’re taking chips off the table and removing the temptation to spend that money out of a checking account.
Setting up direct deposit to multiple accounts is usually a simple process. Just reach out to your employer’s human resources department or payroll provider to inquire about the process. They should be able to guide you through the steps to allocate a portion of your paycheck to your investment account.
2. Use Round-Up Apps Like Acorn, Chime, or Stash
Round-up apps are powerful tools that leverage small everyday transactions to help you save and invest effortlessly. The concept is simple: when you make a purchase with your linked debit or credit card, the app automatically rounds up the transaction to the nearest dollar and invests the spare change.
One popular round-up app is Acorns. With Acorns, your spare change gets invested into a diversified portfolio of stocks and bonds based on your selected investment preferences. This way, even small everyday purchases can contribute to your long-term wealth-building goals.
Getting started with round-up apps is easy. Simply download the app of your choice, link your desired debit or credit card, and set your preferred round-up settings.
From there, the app takes care of the rest, automatically rounding up your transactions and investing the spare change for you.
The beauty of these apps is that you won’t even notice the small amounts being saved and invested. However, over time, these micro-investments can add up quite significantly, especially when coupled with the power of compound interest.
So, if you want to hide money from yourself and effortlessly save and invest, consider using round-up apps like Acorns. It’s a clever way to turn your everyday spending into a powerful wealth-building strategy.
3. Set Up Extra Withholding On Your W4
When you start a new job in the United States, you typically fill out a W4 form to elect the amount of taxes withheld from your paycheck.
Most people aim to have just enough withheld to cover their tax liability. However, this can be an easy opportunity to save more and hide money from yourself.
You can choose to have extra money withheld from each paycheck, which will be returned to you after you file your tax return, and you can use the proceeds to make an investment.
By increasing your withholding, you effectively reduce your take-home pay, which means more money goes into an IRS holding account and less ends up in your pocket each paycheck.
The money withheld is still yours as the amount you withhold on your W4 has nothing to do with the actual amount of your tax liability each year. But the intentional reduction in your paycheck can serve as a forced savings mechanism, allowing you to accumulate funds without the temptation to spend them.
To set up extra withholding on your W4, you’ll need to consult with your employer’s human resources or payroll department – but usually it’s a simple process to get the form updated. They can provide you with the necessary paperwork and guide you through the process.
Simply indicate the additional amount you want withheld from each paycheck, and they’ll adjust your withholding accordingly.
While this method won’t be for everybody, setting up extra withholding on your W4 is a simple yet effective way to build up your savings without relying on willpower alone.
4. Contribute To Retirement Accounts
Retirement accounts, such as 401(k)s and IRAs, offer tax advantages and long-term growth potential, and they’re also a great vehicle for forced savings, albeit you won’t be able to access the funds without penalty until you’re retired.
Contributions to these types of accounts can be easily automated, and by regularly contributing to these accounts, you’re not only saving for retirement but also hiding money from yourself in a smart and strategic way.
The first step is to explore the retirement account options available to you. If your employer offers a 401(k) plan, take advantage of it. Many employers offer matching contributions, which is essentially free money! Contribute at least enough to maximize the employer match—it’s an instant return on your investment.
If you don’t have access to an employer-sponsored plan or want to supplement your savings further, consider opening an Individual Retirement Account (IRA).
Traditional IRAs offer tax-deferred growth, meaning you won’t pay taxes on the contributions or the investment earnings until you withdraw the funds during retirement. Roth IRAs, on the other hand, allow for tax-free growth, as contributions are made with after-tax money.
Once you’ve chosen the right retirement account(s) for your situation, the next step is to automate your contributions. Set up recurring contributions that align with your financial goals and budget. Aim to contribute a percentage of your income or a fixed amount every paycheck.
By doing so, you’re paying yourself first and ensuring that a portion of your earnings is automatically hidden away for your future. It’s important to remember that retirement accounts have contribution limits set by the government.
5. Implement The Envelope System
The envelope system is a simple yet powerful budgeting technique that involves allocating cash into different envelopes based on specific spending categories.
Each envelope represents a specific expense, such as groceries, transportation, entertainment, or dining out.
Here’s how it works. At the beginning of each pay period or month, determine how much money you want to allocate to each spending category. Withdraw the corresponding cash amounts and place them into their respective envelopes.
An example could look like this:
- Groceries: $400
- Transportation: $180
- Entertainment: $200
- Dining Out: $100
This way, you have a visual representation of how much money you have allocated for each expense. Throughout the month, use the cash from each envelope for its designated purpose.
So if you’re going grocery shopping, take the cash from the grocery envelope. When the money in a particular envelope is depleted, you know you’ve reached your spending limit for that category.
This system helps you avoid overspending and stay on track with your budget. By implementing the envelope system, you’re essentially hiding money from yourself in separate envelopes, ensuring that it is allocated for specific expenses and not easily accessible for discretionary spending.
This method promotes discipline, mindfulness, and better financial decision-making. To enhance the envelope system, you can also track your expenses and review your spending habits regularly.
This allows you to identify areas where you may be overspending and make adjustments as needed. The envelope system combined with automatic transfers to investment accounts and mindful expense tracking provides a solid framework for managing your finances effectively.
Remember, the envelope system may require some initial adjustments to your spending habits, but it can be a powerful tool to help you hide money from yourself and gain better control over your finances.
Give it a try to see if this method will lead to smarter spending!
6. Buy A Home
Purchasing a home can be a smart financial move for several reasons. First and foremost, as a homeowner, your monthly mortgage payments contribute to building equity.
Unlike renting, where your money goes toward someone else’s investment, homeownership allows you to gradually accumulate wealth over time.
The “forced savings” component of buying a home is the principal portion of your monthly payments. With each mortgage payment you make, a portion goes towards reducing the outstanding balance or principal. This payment reduces your debt and increases your ownership stake in the property.
Over time, as you continue to make principal payments, your equity in the home grows. Additionally, owning a home provides the potential for appreciation in value. This appreciation can further contribute to building wealth as your home becomes more valuable over time.
Of course, it’s important to carefully consider the financial aspects of homeownership, such as the down payment, closing costs, and ongoing expenses like maintenance and property taxes.
However, when approached with proper planning and financial discipline, buying a home can be an excellent way to hide money from yourself and build wealth over time.
7 – Automatic Dividend Reinvestments
Dividends are a portion of a company’s profits distributed to its shareholders. Many companies offer dividends as a way to reward their investors.
Rather than taking these dividend payments in cash, you can choose to reinvest them back into the company by setting up automatic dividend reinvestments.
By opting for automatic dividend reinvestments, you allow the dividends to be used to purchase additional shares of the company’s stock or investment fund instead of receiving cash.
This simple yet powerful strategy can have a significant impact your long-term wealth in a positive way.
There are several benefits to setting up automatic dividend reinvestments. First and foremost, it allows you to benefit from compound interest.
By reinvesting the dividends back into the investment, you buy more shares or units, which increases your ownership stake. Over time, this compounding effect can significantly boost your investment returns.
Secondly, automatic dividend reinvestment eliminates the temptation to spend the cash dividends. By automatically reinvesting them, you’re putting that money back to work in the market, maximizing your potential for long-term growth.
This approach can be particularly effective if you’re investing in dividend-paying stocks or funds with a track record of consistent dividend payouts.
Forced savings mechanisms are a great way to automate your investing habits, especially if you are new to investing or feel a lack of discipline in your financial life.
Have other ideas for forced savings that you use? We’d love to hear what works for you!