OPINION: I spend a lot of time thinking about money. Part of my job is writing about it, and, perhaps like you, I’m constantly scheming to save more: How else am I going to afford an indulgent vacation or dream house one day?
So I was delighted when I checked one of my savings accounts this week and discovered my balance had doubled since January 2018,and I didn’t even know it.
I soon realised my good fortune was thanks to two low-effort actions: I automate my savings, and I keep the account at a different bank.
Almost two years ago, I opened a high-yield savings account at Ally Bank, which was named the best bank for millennials and the best internet bank in 2018 by personal-finance magazine Kiplinger.
I went to my payroll portal and set up auto-savings to direct a fixed amount of every pay cheque into my Ally account. It took less than five minutes.
Every two weeks, my savings account balance increases by the same amount, plus interest. Ally currently offers a 2 per cent annual percentage yield. That interest rate netted me an extra US$68 (NZ$103) last year.
With automated savings, the money comes out of my pay cheque before I even see it, so I don’t know what I’m missing.
I just assume that money is off-limits, and I can spend only what’s in my chequing account, which brings me to the key part of this strategy and the reason I didn’t know my savings doubled until now: My savings account is at Ally, but my chequing account is at a different bank.
As it turns out, I unknowingly implemented a strategy championed by James Clear, a productivity expert and the author of Atomic Habits. Clear says the best way to quit bad habits (spending money, in this case) is to add “friction”, thereby making it harder to commit the bad habit.
“The best way to break a bad habit is to make it impractical to do,” Clear wrote. “Increase the friction until you don’t even have the option to act.”
By setting up a savings account at a different bank entirely, I made it harder to just transfer money over into my chequing account whenever I’m running low. Clear’s examples of adding “friction” include taking the batteries out of your remote to deter TV watching, and putting your phone in a different room so any time you feel inclined to scroll Instagram or text people aimlessly, you have to get up and find your phone first.
And the best way to develop good habits, like saving money? Make it easy. I can’t think of any easier way to save money than automatically saving it.
As Clear says, “When working in your favour, automation can make your good habits inevitable and your bad habits impossible.”
– This story was first published by BusinessInsider.com.au