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In an Era of Savings, Make it Automatic


Set up the account, watch your money grow, then treat yourself!

Given the choice between immediate gratification and savings for the future, most Americans opted for new Italian loafers or a flat screen TV. Bucking that trend is the recent 6.9% saving rate increase in May 2009, the highest spike since December 1993, according to the US Commerce Department.

Those who are having difficulty saving may find relief in an often overlooked financial product: the automatic savings plan.

Automatic savings plans are easy to arrange and can be opened in the major money-center banks, JPMorgan Chase (JPM), Bank of America (BAC), or Citigroup (C), community and regional banks, credit unions, and financial service firms Vanguard, Fidelity, and Schwab (SCHW).

Consumers can save $100, $200, $300, and up a month or 10% or 20% of their salary and have that money automatically deposited into a savings, checking, or money market account or into a no-load mutual fund, among several investments.

Kevin Reardon, a financial planner and president of Shakespeare Wealth Management, based in Brookfield, Wisconsin, says there are several benefits to automatic savings including:

1. Most of all, it provides a consumer with discipline, a guaranteed way to save. Consumers don't have to worry about budgeting, can't be tempted by spending disposable income on the latest fashion or consumer gadget, and can watch their money grow.

2. Automatic saving encourages people to save a set amount annually: You can accumulate $2,400 or $3,600 minimum if $200 or $300 a month is set aside. If you're saving $200 a month, interest or compounding can boost savings to more than $5,000 in two years.

3. Unlike 401(k)s and IRAs, most automatic savings plans are liquid; funds can be withdrawn if an emergency arises, without penalty.

Consumers can save as little as $50 a month and see their savings grow and many banks open account with a $250 minimum and some online banks require no minimum.

For most people, opening an automatic savings plan is an add-on to a 401(k) plan and not their major investment strategy. Investments in 401(k)s are tax-deferred while these automatic savings accounts aren't. However, it can be an ingenious way to augment and build savings.

Often the people who need it the most, those in debt or with minimal savings, are the most reluctant to launch it, noted Matthew Boyle, a vice president and financial consultant with Charles Schwab, based in Manchester, New Hampshire. These guaranteed saving plans help lift people out of debt and create an action plan to move into the positive column.
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