This is the third post in a (semi-)regular series about getting started in the working world. It will be tailored to my personal experience, so some parts may not completely apply to your situation. I hope it will be a good intro for young professionals just entering the working world (or a refresher for those of us who've been through it for a few years!).
See the other posts in this series:
Allotments = Automatic Saving
The next step in this process is to set yourself up for automatic deductions from your paycheck. This automatic deduction (also called an allotment) moves money straight from your paycheck into your high-interest savings account (which you already set up, right?). It saves you from having to remember to transfer money into savings each month. And more importantly, it keeps you from spending the money. If it's not in your checking account, you won't spend it*!
But to set up your allotments, you need to figure out how much you can afford to save, given your monthly spending habits**.
How much to allot?
Now that you've started tracking your money, you should have a pretty good idea of how much you are spending each month. Let's say your take home pay each month is $2,000 (and remember, the first thing we did in this series was set up automatic retirement contributions, so that's already being taken out, in addition to taxes and fun stuff like that). You've started using Mint and see that your monthly spending is usually around $1,500 (rent, food, bills, gas, etc). This means you can save up to $500 each month! Awesome!
Here's where you need to make a decision. Setting up an allotment means that your money goes straight to savings... it never enters your checking account. This can be kind of nerve wracking.
What if you have a rough month and spend a bit more than usual? Let's go back to the earlier scenario, with a take home pay of $2,000. If you've set up your allotments to be $500 and you need to spend $1,650 that month, you'll be short $150! You could move money from your savings account back over, but I try to make it a rule to not touch money in my savings account.
In my case, I know I can save somewhere in the neighborhood of $1,000-$1,500 eachmonth. But my allotments are only set for $750, and I transfer the remainder separately into my savings account. This ensures I have a cushion of cash in my checking account and then I can move it out at the end of the month once I know I have enough to make it to the next round of bills.
So it's a pretty important decision- I suggest that you start on the lower end of the scale, alloting slightly less than you think you can save each month, until you hone in on exactly how much you can save. Even $50 or $100 each paycheck straight to savings is a good start!
How to set up an allotment?
Now that you know how much you're going to allot, let's look at the form that you can use to set it up.
This is what our direct deposit/allotment forms look like. This form is primarily used for new hires, so if you are already an employee, you might have to do this another way (your online pay system perhaps?). The top section is for you to fill out your banking information so that your paycheck can be direct deposited to you. The next section is called "Allotment Information", and this is where you can indicate another account where you would like your money deposited. If you don't know where to go to set up an allotment, call up your HR people and find out! That is what they're there for :)
This one little form is quite easy to fill out. The tricky part is figuring out how much you want to allot and then making the plunge and signing up for it. This is one of those things that may be hard to do at first since your paycheck hitting your checking account will be less. But soon you'll get used to that lower number in your checking account and you'll get excited by the number growing in your savings account!
* At least, you shouldn't spend it. Don't buy things unless you have enough money to pay for them! If you will have to raid your savings account to buy something, you can't afford it. Unless, of course, it's something big like a car.
** You don't need to worry about changing your spending habits yet. It can be stressful if you try to start cutting back while you are still getting everything set up, and that's when you'd be likely to fall off the wagon and stop doing it all together. We'll take it one baby step at a time... for now ;)
Check out the next post: Emergency Funds!
Who else uses allotments to help them save money? If not, has this post convinced you to do so? :)