Past due: Your savings

If you think of a contribution to your savings as a 'bill' that you pay every month along with your other expenses, you'll be a much better saver with a much brighter future.

Question: My method for saving is to have my financial software program schedule a “bill” each month that represents a contribution to a savings account. When I pay my other bills, I’m automatically reminded to pay this one as well. This is working great, and I've finally acquired the cash reserve I've known I've needed for many years. Do you think this approach is fairly common? Any suggestions for how I might improve my system? —Earl R., Minneapolis, Minnesota

Answer: I don’t know how many people use an approach like yours. Judging by the low American savings rate, however, I think it’s safe to say it’s not all the rage.

But I think it’s a terrific system and I’ll bet that plenty of people would be a lot better off financially and have a much better shot at a secure retirement, if they followed your plan or something like it.

One of the things I like about your approach is that by dubbing your monthly savings contribution a “bill,” you equate it with regular living expenses, like paying the mortgage and utilities. And, in the largest economic sense, that’s what saving is. It’s a way to budget so we can meet future obligations when we don’t have a paycheck coming in, whether that’s during a layoff, a period of illness or in retirement. In short, you can think of saving as the bill we pay today to buy economic security for the future.

But I also think your system has more practical appeal - namely, it makes it more likely that you’ll actually save. To many people, savings is whatever money you have left after paying current expenses. Unfortunately, there always seems to be more expenses than income to pay them - even if some of those “expenses” are gadgets we might be able to do without or fancy options that boost the price of the car we drive or premium cable TV services that inflate our monthly cable bill. (Sorry, HBO. Even though you’re owned by Time Warner, the same company that employs me, I still believe most people would be better off if they spent less on cable and plowed more into retirement accounts.)

As for suggestions for improving your system, quite frankly I’m reluctant to recommend any changes. You’ve got a system you like, that’s easy to follow and, most important, that works. So why mess with success?

The only thing I’d say is that now that you’ve set up your emergency fund, your next step is to use your system to build an investment portfolio for retirement or for general financial security. You can do that by putting a few funds from our Money 70 list of recommended mutual funds on your monthly list of bills. Or for an even simpler approach, you could just steer your monthly payment into a target-date retirement fund that gives you a diversified portfolio appropriate for your age.

But I do have a suggestion for other readers who might want to improve on your approach. The one possible weak link in your system is that it still requires you to take action each month. You’ve either got to write out a check after your program reminds you of your savings bill. Or you’ve got to direct your program to pay the bill.

That may be fine for a conscientious fellow like you. But that one little extra step could be enough to sidetrack many of us.

So I propose a system that eliminates that extra step. How? Sign up for an automatic investing plan, a service that’s offered by most mutual fund companies. Once you set up this option, money is automatically transferred each month from your checking account to whichever mutual fund or funds you’ve chosen. You can find the minimum investment required to start such a plan with a specific fund at Morningstar.com.

By participating in such a plan, you’ll effectively have created something very similar to a 401(k), which automatically deducts contributions from your paycheck. Needless to say, if your employer offers a 401(k), you should be taking advantage of that too.

I recognize that putting your savings on autopilot may not appeal to some people. Fine. You’ve got to find something that works for you. In that case, you may want to “fool” yourself into saving or focus on ways you can carve some really big savings out of your budget.

Finally, if anyone else has some suggestions or uses a different system that’s effective, please share it. When it comes to saving money, most of us can use all the help we can get.