Given the choice between immediate gratification and saving for the future, many people opt for acquiring a flat screen TV or buying a new wardrobe, leaving savings for tomorrow. Often tomorrow never comes. Consumers who are having difficulty saving may find relief in an often overlooked financial product: the automatic savings plan. (For related reading, also check out 5 Ways To Trick Yourself Into Saving Money.)

IN PICTURES: 7 Ways To Position Yourself For Recovery

What Is an Automatic Savings Plan?
Automatic savings plans are easy to arrange and can be opened at the major money-center banks, community and regional banks, credit unions, and via mutual funds. Consumers can typically save as little as $10 or more a month or a percentage of their salary and have that money automatically deposited into a savings, checking, money market account or mutual fund, among several investments.

The Benefits
Financial planners have noted several benefits to automatic savings. Most of all, it provides consumers with a disciplined, guaranteed way to save. Consumers don't have to worry about budgeting a certain amount to save monthly and can't be tempted by spending the allocated money on the latest fashion or consumer gadget.

Automatic savings encourages people to save a set amount annually and have it grow. Saving $200 or $300 a month sounds modest, but at the end of the year that nest egg accumulates into $2,400 or $3,600 and in 10 years it builds to $24,000 or $36,000 not including interest. This is not a get rich quick plan, but a gradual way to save money that builds over time.

Unlike 401(k)s and IRAs, most automatic deposits into savings or investment accounts are liquid; funds can be withdrawn if an emergency arises, and, in most cases, without penalty.

An Additional Savings Tool
For many people opening an automatic savings plan is an add-on to a 401(K) plan, but for others it can serve as a start to an investment or retirement strategy. Investments in 401(k)s are tax-deferred while automatic deposits into savings accounts aren't.

Ironically, the people who need to save the most - those in debt or with minimal savings - are often the most reluctant to launch it. They're afraid to relinquish $200 a month and would rather spend the money. But a guaranteed savings plan can serve as a first step to lift people out of debt, create financial discipline in a consumer's life and launch an action plan to build retirement income.

Seeing money grow can be an incentive to save more. Consumers who save $500 a month see their money accumulate to $6,000 a year and $12,000 or more after two years. As a result, they save more and spend less.

IN PICTURES: 20 Tools For Building Up Your Portfolio

Some Questions to Ask
Consumers need to ask questions when opening an automatic savings plan. Are there any annual fees (most banks don't charge any, but you need to ask) or a charge for terminating the plan? Can it be tied into interest-bearing accounts? Many consumers tie these plans into automatically deposited salaries and then transfer the funds into a money market or mutual fund.

Also keep in mind that if the automated savings plan is tied into a mutual fund, there is risk involved because the mutual fund can decline in value.

Accounts Can Generate Moderate Interest
For savvy consumers, automated savings can be tied into investment checking accounts, which provide modest interest, typically in the range of 0.25% to 0.75%, or can be tied into more risky exchange-traded funds (ETF), which operates like a diversified mutual fund. (For more on ETFs, see 4 ETF Strategies For A Down Market.)

Automated savings can be a helpful tool to lift people out of debt and into the asset column. Before opening one, consumers are advised to analyze their budget, pare down debts, build minimal savings, and then it may be time to open an account. While many investments are aimed at affluent people, automated savings plan can appeal to working class or middle class consumers who want to take control of their money and start savings.

Find out what happened in financial news this week. Read Water Cooler Finance: Insiders, Door Busters And Debt Contagion.

Related Articles
  1. Budgeting

    10 Ways to Save Money at the Farmers' Market

    Strategic shopping can help your budget as well as your health.
  2. Savings

    6 Ways to Save Money on Back-to-School Stuff

    Those school-supply lists just keep getting longer each year. Here's how to shop smart.
  3. Insurance

    How to Shop for Home Insurance

    Tips for getting the best protection for your place and possessions.
  4. Personal Finance

    Sending Money: MoneyGram vs. Western Union

    Comparing the differences between the services – and the fees.
  5. Retirement

    Why Millennials Should Invest in a Roth IRA

    Saving for retirement is important, and it's important to start early. A Roth IRA is a great option for low-earners just entering the workforce.
  6. Home & Auto

    Are Home Inspections Worth It? - Price vs. Value

    If you’re wondering whether home inspection is worth the investment, the following information will help you decide.
  7. Budgeting

    The True Cost of Home Caregiving

    Caring for eldery family in-home might be unavoidable, but most caregivers don't realize the true cost of doing so.
  8. Savings

    Millennials' Money Habits: How to Help

    Millennials gleaned much of their financial savings habits from their parents. Here's where they could use some help.
  9. Savings

    Pay Less for Financial Advice

    Here's a look at what you should pay for financial advice and investment management, what you should get for that price and how you can pay less.
  10. Personal Finance

    Affordable Ways For Upgrading Your Home

    Upgrading your home doesn’t have to be an expensive chore. Here we give you 8 affordable ways to increase its appeal.
  1. Linked Transfer Account

    Accounts held by an individual at a financial institution that ...
  2. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all ...
  3. Foreign remittance

  4. Marginal Propensity to Save

    The proportion of an aggregate raise in pay that a consumer spends ...
  5. Savings Rate

    The amount of money, expressed as a percentage or ratio, that ...
  6. 529 Savings Plan

    A tax-advantaged method of saving for future college expenses ...
  1. How does the trust maker transfer funds into a revocable trust?

    Once a revocable trust is created, a trust maker transfers funds or property into the trust by including them in a list with ... Read Full Answer >>
  2. How is marginal propensity to save calculated?

    Marginal propensity to save is used in Keynesian macroeconomics to quantify the relationship between changes in income and ... Read Full Answer >>
  3. What is the importance of residual value in an automobile lease?

    The residual value of a car is often used by banks and auto dealerships to determine how much to charge per month for a lease. ... Read Full Answer >>
  4. When is an expense ratio considered high and when is it considered low?

    A number of factors determine when an expense ratio is relatively high or low, but a good, low expense ratio is generally ... Read Full Answer >>
  5. What is the difference between residual income and savings?

    Residual income, or recurring income, is income earned on a continuous basis for completed work. It differs from linear income, ... Read Full Answer >>
  6. What is the most effective way to write a successful budget?

    Before you begin writing a budget, gather all of your bank statements, bills and credit card statements for a given month. ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!