Why automatic savings works: How to do it & the best ways to save

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Why automatic savings works: How to do it & the best ways to save
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Several years ago, a study done in Denmark found that automatic savings plans were more effective than tax subsidies when it came to saving for retirement.

‘The fact that you are not paying attention is what will actually make you save more,’ said John Friedman, an assistant professor of public policy at Harvard’s John F. Kennedy School of Government and a co-author of the study.

There is a lot of credence to the ‘set it and forget it’ savings philosophy. But with so many apps and technologies available to help you with automatic savings, how can you be sure your information is kept safe and secure?

Read more: Digit helps automate saving money

How to make sure your automatic saving technology is secure

There are three key areas you need to look out for when it comes to automatic savings technology, or any kind of financial technology for that matter.

Those three factors are identity verification, encryption and insurance.

1. Identity verification

For identity verification, the app or service needs to make sure you are you. The service might ask for items like birthday, address or social security number. Though it can be dangerous to give out your social security number, often it is the only way a financial service can verify your identity. Some other information they might collect would include address and birth date.

The service might also make small deposits into the linked checking or savings account that you’ll need to verify, and they also might ask you to set up a pin number that only you know. These precautions are important steps to take to be sure a criminal is not operating under your identity.

2. Encryption

As far as encryption is concerned, you want to look for technology that uses SSL, or Secure Sockets Layer encryption. This is the same encryption that is standard for the banking industry and is also the technology government agencies use.

3. Insurance

In addition, a good financial service, like a bank, will be FDIC insured, which means it is backed by the government’s Federal Deposit Insurance Corporation. If you find an app or technology you want to try, make sure the technology is FDIC insured, or at least be aware of how your money will be reimbursed if there is ever a theft or security breech.

Read more: How to painlessly save $1 million for retirement by implementing one strategy

Best solutions for automatic savings

Direct deposit

Setting up a portion of your paycheck to automatically go into a savings account is a great way to build your savings. Even better is if it’s placed in an account that is just a little bit out of reach. This will discourage you from dipping into savings for any little thing and will hold your savings for you in case of an emergency or another event when you’ll really need it.

‘Round up to the nearest dollar’ change saving programs

Bank of America’s Keep the Change® program helps you save automatically by rounding up to the nearest dollar on your purchases and putting the difference into your savings account automatically. The app Digit works in a similar fashion, except you can save more than just the change. However, Digit differs in that it does not pay you any interest on your money.

The app Acorns is to investment what Digit is to savings. It also rounds up to the nearest dollar and invests your change once your balance hits $5. But, there is a $12 fee to use this service.

Read more: Acorns, Robin Hood, Stash: Easy smartphone investing roundup

This kind of ‘extra change’ savings program may save someone a couple hundred dollars a year, which is still a good start for someone who is saving nothing now, but even better is to set up a larger savings amount for yourself through direct deposit and putting money aside before you even see it.

To do this, take a look at your income and expenses for the previous 90 days and create some goals for how much you want to save going forward. You might decide you’ll need to cut out some expenses to reach your goals for saving. Then, set up direct deposit with your employer to save the amount or percentage you’ve decided upon. Six months down the road, you’ll be amazed at how much you’ve saved!

Read more: Bank of America’s new mortgage program requires down payment of only 3% with no PMI

Qapital

Qapital is unique in that you can set up various saving rules that allow you to save if you buy certain things, spend a certain amount or resist an impulse purchase.

With Qapital, you can charge yourself when you indulge in something you may not necessarily need (but have to have) and save money at the same time. You could also challenge yourself to spend under a certain amount at a certain store and throw the rest into savings. Or, you could also round up your purchases to the nearest dollar and add the rest to your savings like Digit or Bank of America’s Keep the Change®. Additionally, you can use ‘if then’ rules to trigger savings for almost any kind of activity, such as Tweeting, going to the gym, or when you mark something off your to-do list.

No matter if you are saving a little, a lot, or nothing at all right now, automating your savings and utilizing technology to help you do so can lead to huge payoffs down the road.

Read more: How much a one-time 1% increase in savings will pay off in retirement

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