InSight

Financial Planning Dentist
Investment With

InSight

Menu

The Benefits of an Automatic Savings Plan

Financial Planning Dentist

What Is an Automatic Savings Plan (ASP)?

This is a cornerstone idea for those that have a deliberate and controllable trajectory in retirement. It’s as simple as, if I want to do “x” in retirement, I need to save “y” this year to get there, and then find ways to use payroll or income to make sure that target is hit. 

At InSight we often preach:

Income – Savings = Expenses

As a way of achieving this goal. In this article, we discuss the methods for automating this way of thinking so that savings become technical long before it becomes habitual. An automated saving plan is simply a function of working with your CFP® regarding what your saving rate should be, and then using any of the tools available to make it part of the monthly flow of cash. 

You will typically see savers set up an automatic transfer from a bank account or as part of their payroll into a savings or investment account every two weeks. This kind of forced discipline drives savers and investors to accrue assets throughout the business cycles and remove some of the saving and investment habits that can quickly upend an investment strategy. 

Every time the individual receives a paycheck from their employer, the designated amount is automatically transferred into the individual’s savings account.

Article Key InSights:

  • An Automatic Savings Plan puts the saver in the driver’s seat in an emotionless and academic way.
  • This strategy is convenient for someone who wants to see the account grow steadily over time.
  • It makes savings an early and paramount part of the budgeting process instead of an afterthought.
  • It makes savings a habit over time but can help develop the discipline for those not born or raised with the skillset.

The benefits of an Automatic Savings Plan (ASP)

A savings plan that uses the technology and tools to put saving first, has other benefits as well. If the formula becomes Income – Savings = Expenses, those on a plan for retirement find themselves less likely to miss critical months when things get tight. 

Supports the need to budget 

They also find that setting their budget after savings makes it easier to keep to it. Thinking about their savings as a non-discretionary expense is a great way to go. It’s a necessity, not a hope. 

They also find that if the money is saved and invested, they are less likely to backslide into spending that money. It puts that money in a mental place that is more productive and out of reach for day-to-day demands. This means that some of the small, “nickel and dime” spending that often limits people’s savings is no longer a concern.

The psychology of “money in the bank” is interesting. An entire school of economics is dedicated to it. Known as the Wealth Effect – having a surplus of money in your account causes you to discount its value. This creates a change in behavior pre-cognitively. Here is an example, if a jet ski (my go-to for something fun and likely a poor financial purchase) costs $9,000 and I have $10,000 in my savings account this purchase is 90% of my cash on hand. I will think more seriously about spending that money. If I look at the same jet ski and I have $100,000 in cash it’s only 9% then I might change my mind about the cost of the jet ski. But at no point did the value of the jet ski change, only my opinion of its cost was altered.

In many cases, we make these changes in an item’s valuation before the cognitive brain kicks in. Hence, impulse buying. The grocery store knows this, and if your groceries are EVER short of your budget they have several “impulse” items available to shore up the cost of that purchase.

We think adding an automated savings strategy helps to make sure that the person feeling the negative impact of this impulse is not “retired” you. 

My favorite part of saving first and then spending is I don’t have to worry about what I spend because I have already saved in all the places I need. This enables me to not care as much about spending on a day-to-day basis and relieves a lot of stress about money. 

Managing decisions toward delayed gratification

If I ask people, who would they sign up for $1 million paid today, or $4 million paid in 10 years, far too many would take the $1 million today. It’s understandable, there is pain and debt today you can alleviate, and our brains are not engineered to think logically first, it thinks reactively.
It’s only after the rational brain has a chance to understand the real value of $4 million in a future state that we get comfortable with the idea of waiting for it. The logical part of the brain can be shown the effects of compounding returns that the impulsive brain discounts greatly, and as a result, poor financial decisions are made. 

Managing this “delayed gratification” can be done by having a goal in mind, setting up an automatic way to achieve that goal, and limiting the capacity for the impulse to upset that goal. All of these can be mitigated by using an Automatic Savings Plan. 

 

Saving through losses

An automatic savings plan can also help investors continue to contribute savings to their investment portfolio through losses. Investing for many is highly emotional. Investors become emotionally tied to their own decisions, and they feel the pain of a loss, disproportionately, to the gains of a win. This makes investing hard for most. However, those that develop a portfolio with a long-term expectation, and manage their ability to routinely and programmatically add to it gain several long-term benefits. First, they are able to buy when things are darkest when the headlines are poor, and fear grips lesser prepared investors. Secondly, it helps them manage their buying when things are good. While saving, they limit the number of units they buy when markets are expensive.

Savers, who invest programmatically are less likely to associate a bad investment with a personal decision they made. They are more likely to realize this is “bad timing” rather than a “bad decision” and more likely to keep investing through the trough. 

An investor who sees an opportunity in a market sell-off early, and uses their cash to add, only to see the markets drop further from that buy. This person is less likely to trust themselves when the opportunity is available to add more, and there is a greater chance they have spent their available cash too early. 

Investing programmatically removes this mental drift towards self-doubt, and puts the decision back in the rational camp.

 

More related articles:

How do you manage a daily budget while also planning for your short and long term goals no matter the income?

Planning for both your short term goals while being cognizant of your long term aspirations is really difficult to grasp especially when you’re unsure of what the future “budget” is or should look like. At InSight, our mission is to re-define the client advisor relationship and break away from how it was and unfortunately still is being done.  Advisors in the past ask people what their goals are now without the client having an understanding of what is actually possible.  For example: If my goal is to save $500 a month because it’s what fits my income and budgetary restrictions do I actually know what this will amount to in the future? Or maybe you’re 35 and you’ve saved $100,000 which is incredible but what does that actually mean?  Without knowing how things like compounding, inflation, savings, and returns impact your long term goals most people don’t know how to answer the questions above which is why it’s so important to understand what is possible first so you can actually put together a plan.  So, let’s make up a client. Their name is Frances. Frances is single, 30 years old and makes $75,000 a year. They’ve saved $10,000 so far in their investment account that tracks the whole market and $20,000 in their 401(k) that is in a diversified portfolio her employer offered. Since they just paid off their debt they are going to be able to save at minimum 10% into a 401(k) and $5,000 into their savings account annually increasing with inflation (2.3%). Their employer matches 100% of their contribution up to 5% of their salary. Quick Quiz – How much will Frances have in their investment account if they have $10,000 now and add $5,000 annually increasing with inflation in 30 years? What about in their 401(k) that has $20,000 in a diversified portfolio and they’re contributing 10% of their income each year increasing with inflation?  What is the value of France’s Investment Account? A) $300,000 B) $250,000 C) $400,000 D) $800,000 What is the value of France’s 401(k)? A) $450,000 B) $600,000 C) $535,000 D) $1,200,000 If you didn’t guess D for both questions then you may be underestimating the value of compounding. Now that you can see what is possible isn’t it a little bit easier to plan? For most of us, thinking about the long term is difficult to grasp. This is why it’s so important to sit down with a planner to see what’s possible then talk about building out the plan.  For most, knowing you could have over 2 million dollars when you’re 60 is a dream come true. Unfortunately, most people don’t have anywhere close to this and I think it’s because they didn’t know what was possible when they were young. So whatever your goals are, the best thing you can start doing is saving early and as much as you can. Remember income – savings = expenses. Acquire debt that is accretive, helping you build your net worth, and pay off and stay away from erosive, or bad debt, like credit cards and car loans. Buy a used car instead.  If you have a goal, automate your savings and use a standard compounding calculator (lots of free ones online) to see, with a realistic rate of return, how much you need to start saving to get to your goal. If you need help schedule a consultation.  Check out our other articles on savings and buying a new home for more information! 

Read More »
December 19, 2020 No Comments
Articles
Kevin Taylor

The investment opportunity in semiconductors

Microchips, more commonly known as computer chips or integrated circuits, have become an integral part of our lives. They are present in everything from our smartphones and laptops to our cars and household appliances. In recent years, the importance of microchips has grown exponentially, particularly with the rise of artificial intelligence (AI) and machine learning. At their core, microchips are essentially tiny electronic circuits etched onto a small piece of semiconducting material. They contain transistors, which are essentially tiny switches that can be turned on and off to perform calculations and process information. The number of transistors on a chip has been increasing rapidly over the past few decades, following Moore’s Law, which states that the number of transistors on a chip doubles approximately every two years. The increasing number of transistors on a chip has led to the development of more powerful and efficient processors, which are the backbone of computing power. The more transistors on a chip, the more calculations can be performed simultaneously, and the faster and more efficient the processing power becomes. This has allowed for the development of faster and more sophisticated computing systems, from supercomputers to smartphones. However, the significance of microchips extends beyond just computing power. With the rise of AI and machine learning, microchips have become the cornerstone for the development of these technologies. AI relies on large amounts of data and complex algorithms to make decisions and predictions, which require immense computing power and the ability to process vast amounts of data quickly. This is where microchips come in, providing the necessary processing power and efficiency to support these complex algorithms and enable the development of AI and machine learning systems. As AI continues to evolve and become more advanced, the demand for more powerful and efficient microchips will only increase. Companies that specialize in the design and manufacture of microchips, such as Intel, AMD, NVIDIA, and Qualcomm, are at the forefront of this rapidly growing industry. Investing in these companies can be a smart move for those interested in the potential growth of the microchip industry and the continued development of AI and machine learning technologies. Microchips are a revolution right now, the backbone of modern computing, and are crucial for the development of AI and machine learning. The increasing number of transistors on a chip has led to more powerful and efficient processors, which have enabled the development of faster and more sophisticated computing systems. As AI continues to evolve and become more advanced, the demand for more powerful and efficient microchips will only increase, making them a crucial investment opportunity for those interested in the future of technology.

Read More »
April 18, 2023 No Comments
mindfulness
Articles
Kevin Taylor

Meditation, Mindfulness and Money: 4 ways to channel mindfulness into your money

If you’re looking for some broader answers to the ‘universal question’ I’m not your guy and this is not that article. But I will say that after years of thinking the transcendental was not for me, I’ve changed. If it was real, here and now, I would investigate it for legitimacy. If it was ethereal and spiritual it was for guru’s, theologians, monks and priests. But that has changed for me. I now see mindfulness as a tool that has a very real way of actualizing my intentions, and meditation is the gateway to getting in touch with that.  The deliberate focusing of your mind is no more than coaching it to react in a particular way. Drawing from techniques that are metaphysical (more controllable) and shaping the physical (less controllable). So, to cut through the chaos of daily life, and getting your mind thinking about money, or more broadly wealth is no more difficult than coaching it to think more deeply about your family, career, or your other passions.  Visualize your financial goals Players and coaches have for decades now taught visualization as a method for success. Mindfulness allows the player to be mentally prepared for a situation, before they are called on to act in that moment. To see their options and take advantage of opportunity by running through a situation and potential variables. This speeds up decision making ability and allows people to react faster and with a better sense of how a decision reflects the hope of a game plan. They do this to focus the mind on their desired outcome, before the situation arises. Visualization can similarly help you premeditate the outcome you’re seeking for you and your family’s financial future. It is rarely a lack of opportunity that hinders success, but a failure of recognizing that opportunity in the moment it exposes itself. Having coached your mind to see and react to risk and opportunity is something that you mind can be coached into understanding before the opportunity presents itself. Get real about your finances By taking time to reflect and gain comfortability with your financial situation you can become more intimate and realistic with your expectations. By carving out time to reflect on your situation, the calmness of the moment can help you define more achievable outcomes. This is not to say you shouldn’t expect an extravagant life, but to help you control the resources at your disposal and become capable of mastering the decision making process in front of you.  Through meditation you can calm down otherwise erratic parts of life and focus your mind with greater intention. You can isolate the parts about your financial life that bring you joy and contentment and ready your mind to make decisions that have often been the result of emotion or reaction. Deliberately bringing your mind into focus brings clarity to the more important aspects of your life. Mindfulness about your past Meditation can be used to deliberately shape the way you react to a situation. Using mindfulness it can also be used to relive and relearn from events in your past. Taking time to re-feel how a situation in your past affected your present is a way of coaching your mind to learn from those events. By using the emotions which drive so much of our decision making and combining that with the more deliberative parts of the brain, you can combine the events of your past into the reactions you hope are part of your present.  Imagine if you isolate a single event from your past that shaped your current relationship with money. Reflecting through meditation the events that have caused your current understanding of your financial situation and the history you associate with the subject. You can then reimagine the events and outcome from your past. Learn from that very visceral event, and reshape how you would have rather reacted. The goal is not to relive financial missteps that you cannot get back, but to coach your emotional reptilian brain to cede the lead to your primate and more deliberative brain. By reflecting on the emotional drivers in a meditative process you can recognize the leading indicators events and avoid them in your current situation. Discover your money beliefs though mindfulness By channeling meditation time towards your money habits you can have a more complete and intimate relationship with money. Meditation helps you uncover the person you want to be in life, to shape and imagine how that person thinks and reacts to help define what that person’s intentions about money are. We all hold certain money beliefs, usually as a reaction to our emotions with money and lifestyle. One you begin spending even small amounts of time focusing your mind on money and your relationship with it, you’ll find the beliefs you have about money change. Channeling a deliberate intention into your beliefs will develop more positive money reactions, and those reactions will evolve in habits. This process enshrines the positive money outcomes you desire, into tactical decisions you can control. For many this transformation can happen in the way they save which is one of the leading indicators to financial success. They can transform the way they think and transform the way cash flows through their household flow from “income – spend = save” to “income – save = spend.” This shift in the belief that saving is more pressing then spending is not the natural state for most people, until they gain that more intimate and purposeful mindset around the value of saving. Conclusion Becoming more purposeful with your actions and ultimately your money begins with mindfulness. This mindfulness can be the result of focused meditation on the subject. Reshaping to the way you feel about and react to investment situations, market performance, and risk. Finding time to be deliberative about money allows you to cultivate your reaction to your money and better develop the fiscal life you want.  

Read More »
December 15, 2020 No Comments

Pin It on Pinterest