PocketCoinage

Automating your life can make things a lot easier.  A great example is the morning coffee.  You prepare it the night before and set a timer.  By the time you awake, the coffee has already brewed and is ready for your enjoyment.

The same thing can be said for savings; set it up and enjoy!  Automating your savings can get you on the right path to retirement, vacation, college, emergency fund, or whatever you have your mind set on.

Automation Through Your Employer

Probably the best way to automate your savings is through your employer.  Like most companies out there, they probably offer direct deposit into a checking account.  If you talk with them, they may be able to divide up your pay into multiple accounts by a fixed amount or a percentage of your salary.  By doing this, you can put away regularly without thinking about it or “seeing it” in your check.

Automation With Your Bank

You can also automate transfers with your bank.  My bank, ING Direct, has the option of automating a transfer from a checking account to a savings account.  This is another great way to save money without thinking about it.  It’s also an alternative if your employer does not offer the ability to send your pay to multiple accounts.  It also gives you a little more control over your money.  For example, you can login and change the amount at anytime.  With your employer, this change could take a few pay periods to kick in.  Plus, you may get a regular check instead of a direct deposit while the changes are processed – this is a huge inconvenience for me.

The only downfall to the automatic transfer with your bank is the risk of inadequate funding.  For example, my employer normally deposits on every other Thursday.  If a holiday falls on a Monday of that pay period, the deposit does not get made until Friday.  If I do not time the transfers accordingly, I could end up incurring non-sufficient funds (NSF) fee with my bank. This is something I avoid doing like the plague!

What I Do

Personally, I only automate 403b transfers direct from my employer.  Every pay period I sit down and transfer the money where it needs to go.  This gives me a better understanding of my money and where it goes.

However, I feel the best way to automate would be to have your employer make the deposit for you.  This way you avoid the NSF fee and you don’t “see” the money.  By having my employer deduct my 403b, I do not “see” how large my check would be.  Over the course of two years, I have a decent amount put away for retirement and I do not miss it in my check!

If I decide to automate my savings, I will allow my employer to make the transfer over my bank’s automatic transfer.

Do you automate your savings?

So, you made your final auto payment.  3 – 5 years (or less) of blood, sweat, and interest have paid off.  Now the big question is, “What do I do with this extra cash flow?”  Sure, you can disperse this back into your checking account, but what happens in another couple of years once another vehicle is needed?  Will you have enough for a decent down payment (20%)?  Maybe you want to buy your next car in cash?

I recently paid my 5 year auto loan in less than two years and now I’m starting to ask myself these questions.  I am finding many things to do with this extra cash flow, including spend it!  I need to come up with a plan so that I can stick to my goals.

Using the Auto Payment to Pad the Emergency Fund
Using this extra cash flow to pad my emergency fund might be the best idea to reach my goal of $20,000 sooner.  I might direct most of the auto payment here for a few months just to give it a boost.  If I redirect the whole amount to my emergency fund, I will easily reach my goal by the end of the year.

If you do not have an emergency fund, it’s important that you start as soon as possible – even if the amounts are small.  You will be better off just by getting into the habit of saving.  Remember, it starts with the small things!

Using the Auto Payment to Pay Down Debt
I’m also considering using this to pay down my student loans.  Since I make too much money to write off the interest on my taxes, I want to rid of this debt as quickly as possible.

According to the IRS for 2009, if you are single and your modified adjusted gross income is above $75,000, you are not allowed to deduct the interested.  The deduction is phased out between $60,000 and $75,000.  If you are married and make more than $150,000, you cannot deduct student loan interest.  This too gets phased out between $120,000 and $150,000.

The bottom line is you are allowed to deduct the most student loan interest IF:

• You file as single and make less than $60,000.
• You file as married and make less than $120,000 combined.

Check with your tax advisor to see if you qualify to write off student loan interest.

Using the Auto Payment to Save for Another Vehicle
Why not continue to make auto payments to myself?  By doing this, I’ll be ahead of the game for when it’s time to get another vehicle.  I may even be able to buy the next one in cash!

Divvy up the Money
There are many things I would like to do with this extra cash flow.  In the end, I might divide it up in equal parts to various saving accounts.

I will keep you posted on which route I take.  What have you done with the extra cash flow after a debt was paid off?