How to save smarter with an automatic savings plan

The Financial Conduct Authority reported that 53% of UK adults stopped or reduced saving in the year leading up to January 2024.¹ This suggests many Britons need some extra help to save. And this is where an automatic savings plan may be worth exploring.

What is an automatic savings plan?

An automatic savings plan is a simple personal finance strategy in which money is regularly transferred to a savings account. This may be done weekly, fortnightly, or monthly.

• Scheduled transfers. Money is automatically deposited into a savings account regularly, usually aligning with a person’s pay cycle.

• Direct from wages. A portion of each paycheque is deposited directly into a savings account, simplifying the process and ensuring savings grow consistently.

An automatic savings plan may help make saving more consistent and bring more predictability to personal budgeting. Either current or savings accounts can be used for this approach, but it may be advisable to arrange for funds to flow into an account that is not used for regular spending.

How to automate your savings with a savings plan

Saving consistently is essential to providing financial security and helps achieve long-term goals. An automatic savings plan can be arranged with some employers or done so independently with personal banking.

Automate savings through your employer

This is known as a payroll-deducted saving scheme that allows employees to request a separate direct deposit from employers. How it’s done:

• Employees ask their employer’s payroll department to split payments between two (or more) accounts.

• Wages are broken up in the way the employee has requested. For example, some employees may ask that 10% of their salary be paid into their savings account.

Locking in regular savings in this way may help people reach their financial goals.

Automate savings through transfers

Another way many Britons set up an automatic savings plan is by arranging the transfers themselves. This is often as straightforward as:

• Opening a savings account. Recurring payments can then be set up to automatically transfer from the account where wages are received into the chosen savings account.

• Setting up a standing order. Standing orders are regular payments from one account to another for a fixed amount on a specified date each month. They may be more convenient for savers who prefer not to transfer money manually.

Should you automate your savings?

Automatic savings plans may be beneficial for building savings without regular manual transfers by ensuring consistent contributions. However, they may lack flexibility for those with fluctuating incomes

Here are some benefits and drawbacks of automatic savings plans.

What are the advantages of automatic savings?

Automatic savings plans may help people set and forget their regular contributions that accumulate over time without ongoing management. This method may nurture positive financial habits.

Whether saving up for an emergency fund or a milestone purchase like a first car or home, automatic plans may help grow savings slowly over time.

What are the disadvantages of automatic savings?

Automatic savings could also strain the finances of people with unpredictable incomes. And in some cases, savings account fees may be involved.

Being strict with automatic deductions may limit immediate access to cash too. People who struggle with overspending may find they would be better off holding onto the funds for essential expenses, instead of earmarking them for automated saving.