The Overlooked Secret to Building Wealth: Automate your Savings

BRENNAN mCcARTHY, cfp®

In the pursuit of financial stability and wealth accumulation, one of the most effective yet often neglected strategies is the establishment of a savings plan. The beauty of this approach lies in its simplicity and the power of automation.

1. Understand Your Cash Flow

The cornerstone of any savings plan is a clear understanding of your monthly cash flow. This means knowing exactly how much money you’re spending compared to what you’re earning. While budgeting may seem like a chore to some, it’s an indispensable tool for setting up a savings plan. Without this knowledge, you’re essentially navigating your finances blindfolded.

To get started, calculate the average of your last six months’ expenses and compare it to your net income. If you’re fortunate enough to have a surplus, congratulations! You’re already on the right track.

2. Automating Your Savings

If your income exceeds your expenses, the next step is to automate the process of saving the difference. This isn’t just about discipline; it’s about making your savings foolproof. By setting up an automatic transfer to your savings account each month, you ensure that you’re consistently building your wealth without having to think about it.

This method is particularly effective for those who don’t adhere to a strict budget. It acts as a self-imposed limit on your spending, keeping you within the financial boundaries you’ve set for yourself.

3. Tailoring Your Plan for Variable Incomes

For those with variable incomes, such as commission-based earners, the strategy shifts slightly. Instead of setting a fixed amount to save each month, it’s more practical to aim for a cash reserve goal.

A prudent target is to maintain at least six months’ worth of expenses in your savings. For example, if your monthly expenditure is $6,000, aim for a cash reserve of $36,000. Periodically review your accounts, and any excess over your target reserve should be moved to investments.

While this approach requires more attention than a set-it-and-forget-it monthly savings, it’s a powerful way to ensure you’re not sitting on idle cash that could be working for you in the market.

Whether you’re on a fixed or variable income, the key to building wealth is consistency and foresight. By automating your savings or setting cash reserve goals, you’re not just saving money; you’re building a foundation for future financial freedom. Stick to this strategy, and over time, you’ll likely find yourself ahead of the game, with a growing nest egg that can support your long-term aspirations.