Do you want to know the secret to building wealth?
It’s not investing in technology, hoping to find the next Apple or Facebook. It’s not flipping real estate. The real secret is considerably less sexy — set up automatic deposits from your paycheck to a savings account.
That’s it. If you want to become wealthy, it’s as simple as saving a portion of your paycheck each time you’re paid. There are strong psychological benefits to automatically saving money. First, let’s look at how most people handle their paychecks.
When people receive a paycheck, they already know how they want to spend it — rent, food, savings, whiskey and so on. Then, people attempt to limit their spending to achieve their goals — this is where things go wrong.
A friend invites you to a concert, or you see some new clothes you like. You make a deal with yourself: “Next paycheck, I will save twice as much.”
But this never happens. The month’s end comes around, and you’ve either spent all of your money, invoking feelings of guilt, or you have to decide where to put the money for savings.
Constantly remembering to save and limit your spending is tiring. You can see how easy cheating yourself on saving is. Now, let’s see how this scenario plays out when using automatic deposits.
You receive a paycheck, and within a few days deposits are made automatically from your checking account to a savings account.
For the rest of the month, ball out in Tigerland all you want because now you don’t have to worry about limiting your spending and cheating on your savings will be a relic of the past. Once the automatic deposit hits, there is freedom in knowing you can spend your money how you want, guilt-free.
However, there are some caveats. First, you have to know how to live within your means. Saving $10 a month means nothing when, realistically, you could be saving $60. Know your cost-of-living and your savings goal, and balance the two.
The second roadblock is getting paid a variable amount each paycheck. Automatic savings with variable pay can be done, but it requires a bit more finessing.
If you’re convinced of the power of automatic savings, then let’s take it to the next level — automatically investing those savings. Instead of putting the saved money in a separate savings account, send it to an investment account.
If your company offers a 401(k), put it there. If it doesn’t, put your money into an IRA. If you don’t have an IRA, you can still set up automatic deposits to a brokerage account like E-Trade or Charles Schwab. Then have your brokerage automatically invest the money into your preferred investment, such as a low-fee ETF.
To set up these automatic investments, go to your 401(k) or brokerage website, and there will be an option for a recurring investment.
For example, if you get paid on the 15th of every month, you can link your brokerage to your bank account and set it up so that every month on the 16th, it takes out a specified amount of money, automatically investing it that day.
So that’s it — the whole secret to building your wealth. By automating the savings in our lives, we remove the risk of having our emotions interfere with our savings plans, reducing our stress in the process. The best part is this costs nothing, so you have no excuses not to set up your automatic deposits today.
Jay Cranford is a 22-year-old finance senior from St. Simons Island, Georgia.