Savings accounts are a necessity in today's economic climate. The younger an individual starts saving, the more comfortable they'll be in their retirement years. However, the common citizen is still feeling the effects of the 2007 economic downturn, wages have remained stagnant.
According to a study from Stephen Rose of the Urban Institute, American workers' wages have increased only 13 percent since 1979. The percentage was adjusted for inflation, as it relates to the consumer price-index. In the meantime, living costs are increasing to unsustainable levels, according to a study from the National Association of Realtors. In a press release, the NAR said incomes have not kept pace with rising rents, and as a result, renters are feeling an economic pressure.
Interestingly, Bloomberg Business noted younger citizens are looking to buy a house because of these trends. Some see buying a home as a smart investment because owning a house also entails building equity. Of course, homeownership first comes with a down payment, which should ideally be no less than 20 percent of the home's price. Add in monthly bills to outstanding financial obligations, and millennials may find it hard to put money aside every month for savings.
On the other hand, taking money from monthly income totals and transferring it to a savings account is exactly what young individuals should do. Savers have a few ways to set aside money: They can either manually transfer the money, or set up an automatic savings plan.
Benefits of automatic savings
In a study commissioned by New York Life Insurance, 64 percent of soon-to-be retirees said an automatic savings plan helped them save in a disciplined manner. The respondents, who were between 50 and 62 years old, said they wished they had started a savings plan earlier, ideally around 26 years of age. The survey also revealed that, on average, pre-retirees started a savings plan when they were approximately 34 years old, and even then, they said financial obligations made it difficult to save.
Setting up an automatic savings plan is effortless and requires little oversight on behalf of the account holder. At most workplaces, employers have a direct deposit system in place. Workers should see if they can delegate a certain percentage to a savings account, according to NerdWallet. For instance, employees can set up a transfer so 10 percent of every paycheck is automatically deposited into the savings account. In a few years, enough money may have been saved for a down payment or other big life expense.
"Soon-to-be retirees said an automatic savings plan helped them save in a disciplined manner."
Transfers can also likely be set up between a checking account and savings account. You'll want to make sure this is possible with your banker, but the idea is still the same. By creating an automatic deposit, you won't second-guess yourself about whether you can set aside money.
How much to deposit
The percentage of what to save every paycheck is up to the individual. You should analyze your current lifestyle and determine a reasonable amount of money you'll need every week. For instance, if you make $500 a week, trying living off $400 and set up an automatic deposit of $100. This hypothetical situation, as highlighted by The Simple Dollar, can result in thousands of dollars in savings even if individuals receive pay raises.
Automatic savings are also beneficial for cutting bad spending habits. By forcing yourself to live off a smaller paycheck, you'll learn how to properly budget and pay for the essentials. In essence, you're forcing short-term sacrifices for more financial freedom when you reach retirement.
Automatic savings plans will provide many benefits later in life. As a recent survey revealed, many pre-retirees wished they had started saving money sooner. With a recurring deposit into a dedicated savings account, individuals can get a head start to ensure a comfortable retirement.
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