Why Direct Deposits Matter

Why Direct Deposits Matter

The following post comes from the America Saves Blog. Follow them on Twitter and Facebook.

By Brian Page
Personal Finance and Economics Educator with Reading Schools

The goal of this article is to provide the content and behavioral tips necessary to save.

Understand yourself and how to overcome your own savings obstacles


Saving can be exhausting if you allow it to be. As John Tierney points out in Decision Fatigue, we draw from a chemical in our brain to feed our willpower each time we make a choice. The more frequently we surround ourselves with things we really want and choices we have to make, the more we draw from this chemical. Do not make saving another draining choice you have to make, make saving automatic.

The Marshmallow study best illustrated the challenges we innately face to delay gratification, and the latest Marshmallow study is digging into the particular challenges people face who have had previous experiences that punished them for waiting, complicating the problem even further. We have seen how hard it is for people to pass the test. Do not put yourself through the torture of delaying gratification, make saving automatic.

Become a member of a Bank, Credit Union, or Matched-Savings Program

Find a bank or credit union that offers the lowest fees, or better yet prize-linked savings programs. Do not concern yourself with the interest you are going to earn on your savings account. Rates are low and are likely to stay that way for a while. So, your interest won't add up to much if you do not have a lot of money. What can add up are fees - - so comparison-shop for financial institutions that offer the lowest possible fees.

Another option is matched savings programs such as Earn, who also provide additional support services designed to help low-wage families.

Make saving automatic with direct deposit

A direct deposit electronically deposits funds directly into a bank account as a form of payment.  To be clear, only establishing a direct deposit into your checking account isn’t going to help you much. Set up allotments through DFAS or ask your financial institution to setup a second and a third direct deposit into your savings account and retirement account. This is sometimes referred to as “split deposits”. Make sure there is no additional fee for setting up or using a direct deposit service

This paper by Mindy Hernandez of the nonprofit CFED provides behavioral insight on the decision making process“…often the decision we make is not about the ‘optimal choice’ but the one that requires the least amount of effort – the one on the path of least resistance. Defaults are the option you get if you do nothing at all, and they are extremely ‘sticky,’ meaning you are not likely to change the decision (or lack thereof) once it is done…” In other words, by saving first with a direct deposit it would be harder not to save.

The positive results of setting a savings goal and reaching it by making saving automatic is confirmed with research over and over again. According to research by the Electronic Payments Association, 93 percent of employed adults who use split deposit contribute to their savings every month. Conversely, of employed adults who do not use split deposit, 23 percent contribute nothing to their savings.

Make investing automatic with a Direct Deposit

This quality resource on the Department of Labor website empowers employees with useful information about retirement plans, and the power of compound interest. Here is the example the DOL used to illustrate the importance of beginning to invest for retirement at a young age:

“A 20 year old who saves $1,000 a year for 11 years in a row, then stops but leaves it there to earn 7% interest, will have $168,514 at age 65.

However, a 30 year old who starts saving $1,000 a year for 35 years, also earning 7% will have only $147,913 at age 65. Even though the 30 year old has put in more money for more years, it has less time to earn that compound interest.”

In other words, as soon as you get your first paycheck, start contributing to the TSP, employer-sponsored retirement plan, or an individual retirement account and do so electronically with a split deposit. Make sure there is no additional fee for setting up or using a direct deposit service.

Set a savings goal, take the pledge, and remember that direct deposits matter.

Brian Page is a personal finance and economics educator with Reading Schools, where he was named a Milken national educator recipient and Money Magazine "Money hero." He also serves as an Outreach Director with Cincinnati United. You can follow him on Twitter at @FinEdChat.

For more information:
Out of sight, Out of Mind: How to Save Automatically
Make Saving Automatic
New Year’s Saving Resolution #2: Save Automatically

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