I'm Saving an Extra $3,000 This Year Thanks to One Simple Change
KEY POINTS
- I'm saving an extra $3,000 this year by turning on automatic contributions to my retirement account.
- Auto-contributions work because I only think about it once a month, avoiding temptation to spend elsewhere.
- This simple change taps into psychological tendencies like present bias and habit formation, making saving easier.
After a series of poor financial decisions in 2020 and the years following, I was down a five-digit retirement account. Rebuilding it has been a chore and a half. Sweeping the leftover dollars from my checking account into my IRA hasn't made much of a difference, honestly.
Thanks to the advice of some people smarter than I, I've managed to turn that around. I'm saving an extra $3,000 this year thanks to one simple change: making automatic contributions to my retirement account. Here's why it's actually working.
I only think about the money once a month
Automatic contributions work because I only remember I'm making them once a month. Nobody confronts me when I chop hundreds off my monthly earnings and funnel it into a 401(k). I get no emails or phone calls. I barely remember I have a 401(k) -- and that suits me just fine.
Once per month is the ideal schedule for thinking about my retirement savings. It's frequent enough that I can appreciate growth; I feel secure about my future. But it's not so often that I start to wonder, what else could I spend that money on? The temptation just isn't there.
Turning on auto-contributions has helped me save $2,964.73 this year tax free, without changing my lifestyle noticeably. Without it, I would have added $0 to my 401(k).
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The psychology behind auto-contributions
Auto-contributions are so effective because they tap into universal mental tendencies. Two of these tendencies are present bias and habit formation.
Morgan Housel, author of The Psychology of Money, says, "Doing well with money is not about what you know, it's not about where you went to school or how smart you are, it's how you behave." Turning on automatic contributions helps you behave rationally by overcoming present bias, the tendency to prioritize immediate gratification over long-term benefits.
In his book Atomic Habits, James Clear says enrolling in an automatic savings plan is one of four ways to lock in good, long-term financial habits with a single action. Doing so taps into the idea that good habits are easy to form when you don't see them or feel them working.
I feel more secure
I feel more secure about my future knowing that I'm saving toward retirement. Despite not meeting all my financial goals (RIP, emergency fund), I'm moving forward. Movement feels productive, and productive is what I want to be, especially for retirement.
Some of my friends tell me that life is worth living now, which makes saving for the future less important. But I disagree. Shuffling some money toward retirement is long-term based, yes, but it brings me peace of mind today. The month I started contributing to a retirement account, I felt my chest lighten.
Two ways to set up automatic contributions
Set up auto-contributions by directly depositing a percentage of your paycheck or turning on automatic deposits. I do both. I send a percentage of my income to my 401(k) -- it goes straight from my employer to my retirement account. It's my favorite way to save.
But I didn't set up direct deposits into my Roth IRA. For that, I set up automatic contributions. Every day, my broker withdraws money from my checking account and deposits it into my IRA. It's a little more painful because I see the money leaving my checking account, but it works.
Robinhood matches my Roth IRA deposits like an employer. The bonus cash helps me save faster for retirement, and that's the most I could ask of a stock broker. Sound good to you? WARNING SCL [brokerage slug=robinhood field=apply_url] does not generate a link. Anchor tag will not render in production. and start contributing to get your own IRA match.
Auto-contributions have been a game-changer for me. Whether you're rebuilding like I was or just starting out, give it a shot. Set it up, forget about it, and watch your savings grow. It's not glamorous, but it works -- and that peace of mind? Totally worth it.
Our Research Expert
Cole Tretheway is a full-time personal finance writer whose articles have been featured on Motley Fool Money and The Motley Fool. He has a degree in English with a Certificate in Professional and Technical Communication from California Polytechnic University, SLO.
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