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Banking

Automating your savings will help you save more—here's the psychological reason why

Here's how automation helps curb our desire for immediate satisfaction.

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JGI/Jamie Grill
Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.

You might have noticed that almost every financial advisor and money expert has more or less the same piece of advice for building wealth and stashing away more money faster: automate your savings. While this trick for saving money may not be new, it really works — and it's thanks to psychology.

When it comes to managing your personal finances, automation is more common than you might think. We see it at work when a percentage of our paychecks is automatically deposited into our employer-sponsored 401(k) accounts. A portion of our pre-tax money gets taken out of our paycheck and invested for retirement — without needing to manually move money into the account.

But if we had to make the efforts of deciding how much of each paycheck should go toward our 401(k) for every single pay cycle and then making the transfer, how many people would continuously contribute and how many would save more irregularly?

As it stands, only half of Americans participate in a workplace retirement plan. And automation plays such a significant role in saving money that, according to MarketWatch, Congress wants to propose legislation that would require companies to automatically enroll employees in a retirement savings plan and have 3% of their paychecks default to the account.

So why is automating your savings such a game-changer when it comes to your money?

Automation helps us avoid present bias

As humans, we tend to have a need for immediate satisfaction. When faced with a decision — like whether or not to splurge on a sale or invest the money — we are biased toward our present selves, so we're likely to make the choice that will benefit us most in that moment. This thought process is called the present bias.

The farther into the future the alternative option is, the less important it seems. This can become a roadblock when it comes to saving for large future purchases like buying a house or paying for a wedding. And it's a big reason why saving for retirement can be so hard.

However, we can overcome present bias by taking away the ability to choose between saving and spending altogether. This is where automating your savings comes in.

When we're automatically enrolled in a 401(k) plan at work and start contributing 3% (or more) of each paycheck toward it, we don't get the chance to choose between putting the 3% toward retirement or using the 3% for something else because we never see the cash in our checking account.

Chances are, you can probably think of a few things you'd prefer to spend this money on right now. Automation ensures that we're making retirement contributions that will grow without us even thinking about it.

So when financial experts advise clients to automate their savings and investments to build wealth, it's because the strategy actually, psychologically works.

How to make automation part of your financial plan

There are a few ways you can automate your savings.

If you use direct deposit for your paycheck, you can update it so you split your paycheck between a checking account and a savings account. This way, a portion of your paychecks go straight into your savings account and whatever is in your checking account is fair game for your expenses.

Another simple way is to set up automatic deposits from your checking account into your savings account. Set the deposits to occur on the same day each month (like the day after your paycheck hits the account). This way, you'll be saving a fixed amount of money regularly without even giving yourself the chance to use it for something else.

Where to save the money

Use a high-yield savings account, like the Ally Online Savings Account or the Marcus by Goldman Sachs High Yield Online Savings. High-yield savings accounts allow you to grow your balance a little faster by offering higher interest rates compared to the rates offered by traditional savings accounts. There are many different options to choose from, though, so we've rounded up some of the best high-yield savings accounts.

Ally Bank Online Savings Account

  • Annual Percentage Yield (APY)

    0.50%

  • Minimum balance

    None

  • Monthly fee

    No monthly maintenance fee

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D

  • Excessive transactions fee

    $10 per transaction

  • Overdraft fees

    $25

  • Offer checking account?

    Yes

  • Offer ATM card?

    Yes, if have an Ally checking account

Terms apply.

Marcus by Goldman Sachs High Yield Online Savings

Information about the Marcus by Goldman Sachs High Yield Online Savings has been collected independently by CNBC and has not been reviewed or provided by the bank prior to publication. Goldman Sachs Bank USA is a Member FDIC.
  • Annual Percentage Yield (APY)

    0.50%

  • Minimum balance

    None to open; $1 to earn interest

  • Monthly fee

    None

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D

  • Excessive transactions fee

    None

  • Overdraft fees

    N/A

  • Offer checking account?

    No

  • Offer ATM card?

    No

Terms apply.

Bottom line

While it's OK to splurge or purchase something you really want in the moment, make sure you're taking steps to save money before you make any spending decisions. Automating your savings isn't necessarily new advice, but it works because it helps you overcome present bias. This way, you bypass any situations where you have to choose between saving money and buying something you want.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.