Automatic Savings Plan: What it Means, How it Works, Example

What Is an Automatic Savings Plan?

An automatic savings plan is a type of personal savings system in which the plan contributor automatically deposits a fixed amount of funds at specified intervals into their account. The typical structure of this type is an automatic transfer from an individual's bank account into a savings or investment account every two weeks.

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

Understanding Automatic Savings Plan

An automatic savings plan has other advantages than just the convenience of not having to manually deposit funds into savings each month. For instance, this system makes it easier to stick to a personal budget, since it is harder to overspend and dip into your savings once they are automatically removed from your bank account.

This system also helps investors continue to contribute savings to their investment portfolio over a long period of time, which can often become emotionally difficult to keep up after suffering losses on a few investments or other experiences.

Direct Deposit Into Savings Plan

It’s not difficult to set up an automatic savings plan. Once you have established a savings account, link it to your checking account. From there, request direct deposit through your employer. You can opt to have part of your paycheck directly deposited into your savings account each cycle with the rest going into checking.

Example of a Savings Plan

Another option is to set up an automatic transfer from your checking account to your savings account each time you're paid. A common automatic savings plan is offered through Capital One, which takes less than one minute to set up, according to their website. Customers indicate how much they’d like Capital One to put away and how often; Capital One then takes care of the transaction in a customer’s “360 Savings Account.”

Automatic Savings Plan and a Personal Financial Plan

An automatic savings plan can be a critical part of a larger personal financial plan. Personal finance encompasses all financial decisions and activities of an individual or household, including earning, saving, investing and spending. There are specific products associated with personal finance like credit cards, life and home insurance, mortgages and a range of investment vehicles. Banking is also considered a part of personal finance, including checking and savings accounts, along with financial apps like the payment services PayPal and Venmo.

Certain apps like Wise and Wave offer more complex services like remittances. (These are funds that an expatriate sends to his or her country of origin.)

Taxes are also an important consideration in a personal financial plan. Even keeping in mind particular deductions like the student loan interest deduction can go a long way toward reducing what you have to pay the U.S. government each year and saving that money for future use.