Automatic savings and investment plans: The full breakdown

Savings plans can help build wealth. This includes automatic savings and investment plans. Here’s what you need to know.

Video Transcript

- An automatic savings plan is a plan that deposits money into one account from an existing account on a regular basis. If your employer offers direct deposit, you can set up automated withdrawal, where a portion of each paycheck goes directly into a savings account instead of your checking account. You can also use automatic savings to put money into investment accounts you may have. In which case, the money taken out will be used to buy shares at the current market price.

Automatic savings and investment plans are useful wealth building tools that can help you adjust your savings and spending patterns. They enforce a useful discipline as it's harder to dip into money just sitting in your checking account, because there's less of it. Another way to use automatic investment plans is to obtain a higher rate of interest for your savings.

If the bank or credit union, where you have your checking account, doesn't offer very high rates on a savings plan or money market savings account, you can use an automatic savings plan to transfer money from your checking to a savings or money market account, offering a higher interest rate. If you're saving up for the long term and are risk averse, a low risk account, such as a savings account or certificate of deposit, may be appropriate. If you're comfortable with higher levels of risk and want your account to grow at a potentially faster rate, stocks and mutual funds may be a better option. You can build retirement funds through automatic investment with a sponsored retirement plan, like a 401(k), 403(b), or 457 plan, or on your own with an IRA. Stay financially fit, friends.