How to automate savings on payday

Saving whatever is left at the end of the month rarely works. By then the money has gone to groceries and a few small things you don't remember buying.

Automating flips the order. The savings move on payday, before you spend anything, and you don't make the decision again each time. This is the pay-yourself-first method, set up so it runs on its own. It works best when you budget each paycheck as it lands, so you know how much each transfer can take.

Two ways to automate it

There are two common setups. Pick one, or use both.

Split your direct deposit

Many employers let you send your paycheck to more than one account. Ask payroll or look in your HR portal for direct deposit settings. Send a fixed dollar amount to savings and the rest to checking.

This is the most hands-off option. The savings never touch checking, so you can't spend them by accident. The catch is that changing the amount means going back through payroll.

Schedule a transfer for the day after payday

Set a recurring transfer from checking to savings in your bank's app. Time it for the day after your paycheck usually lands, so the deposit has cleared first.

This is easier to change, which helps while you're still finding the right amount. Match the schedule to how you're paid:

• If you're paid weekly, transfer weekly.
• If you're paid every other week, transfer every other week.
• If you're paid twice a month, set two transfers, one after each pay date.
• If you're paid monthly, set one transfer.

If you're paid every other week, two months in most years have a third paycheck. Since your bills are usually planned around two paychecks a month, a third paycheck is a good time to send a bigger amount to savings.

How much to automate per paycheck

Start from the paycheck, not from a savings goal. The amount has to fit after the bills that paycheck covers.

1. Take one paycheck.
2. Subtract the bills due before the next payday.
3. Subtract what you need for groceries, gas and everyday spending until then.
4. What's left is the most you could save from this paycheck.

Automate a share of that, not all of it. If what's left is $300, a $100 transfer leaves room for a surprise. You can raise it later.

Some paychecks carry rent and have less room. You can set a smaller transfer for those or skip them, as long as the plan is written down.

A fixed dollar amount is easier to plan around than a percentage. The exception is irregular income. If your deposits swing, send a set percentage of each deposit instead, so a small one sends a small amount.

Where to put the money

Use a savings account at a different bank from your checking. A transfer between banks takes a day or two. That small delay makes it harder to dip in for something that isn't an emergency.

Look for an account with no monthly fee and no minimum balance, and check that it's FDIC-insured. A high-yield online savings account usually pays more than the savings account attached to your checking. Rates change, so compare them when you open one.

Keep the transfer from overdrawing checking

The risk with automation is a transfer that pulls money a bill needed.

• Time the transfer after the paycheck clears, not on the expected pay date.
• Keep a small cushion in checking that the plan never counts as spending money.
• Turn on a low-balance alert in your bank's app.
• When a bill goes up, lower the transfer the same day.

If a month gets tight, lower the transfer instead of turning it off. A smaller transfer keeps the habit going, and you won't have to set it up again later.

Make it grow without thinking about it

• When you get a raise, send part of the increase to savings before you get used to the bigger paycheck.
• When a debt is paid off, move its old payment to savings.
• Decide ahead of time what share of a tax refund or bonus goes to savings. Write it down so you don't decide when the money is already in your account.
• Round-up features in some banking apps add small amounts on top. Treat them as extra, and keep the payday transfer as the main plan.

What the emergency fund is for

Write down what counts as an emergency before you need it. A job loss, a medical bill or a car repair you need to get to work counts. A sale doesn't.

If you still have high-interest debt, build a small starter fund first, then send most of your extra money to debt. Here's how to decide between an emergency fund or paying off debt first.

Track it next to your budget

The transfer runs on its own, but you still want to see it in your plan. Otherwise your checking balance looks bigger than it is right before the transfer runs.

If you used to track this in Mint, here's what to use now that Mint is gone. If you're on Monarch and want something built around paydays, here are some Monarch Money alternatives.

Budgey is a paycheck budgeting app. Your budget period runs from payday to the day before the next payday. You can set up the savings transfer as a Loop, Budgey's recurring transactions, so every period plans for it. Pin an emergency fund goal and log each contribution, and Budgey tracks your streak. Core is $5/mo or $20/yr with live sync for 1 bank. Plus is $10/mo or $100/yr for 2 or more banks, which helps when savings sits at a different bank.

Pay yourself first is one of several budgeting methods. Here's how the main budgeting methods compare.

FAQ

How do I automate savings on payday?
Split your direct deposit so a fixed amount goes to savings, or schedule a recurring transfer for the day after each payday.

How much should I automate from each paycheck?
Start with part of what's left after the bills that paycheck covers and your everyday spending. Raise it once a few transfers have gone through without trouble.

Should I automate a fixed amount or a percentage?
A fixed amount if your paychecks are steady. A percentage of each deposit if your income changes.

What if the transfer overdraws my account?
Move the transfer to the day after the paycheck clears, keep a small cushion in checking, and lower the amount instead of stopping.