Implementing an automated way to manage your surplus, is number five in the tens steps to financial freedom. This easy strategy is part of the millionaire mindset, where you learn the discipline to “pay yourself first”.
Paying yourself first, means putting away your surplus before you pay your bills. It sound simple, but it is really powerful.
- Are you finding it difficult to commit to a longer-term savings plan?
- Are you struggling to make regular deposits into your bank account?
- Do you find yourself going back to the little amount that you have saved and thus hindering your efforts of saving?
If your answers to these questions are yes, then the perfect solution for you might be to open a forced savings account.
Forced saving accounts were designed to help individuals who find it difficult to save and attain their saving goals, mostly long-term. Other people who may take advantage of these accounts are the people who often forget to deposit money into the savings accounts. Also, if you cannot resist the temptation of dipping your fingers into the money before you reach your target amount, this account is what you need. Before we tell you how to implement a forced savings plan, lets first see how this type of account works.
How do forced savings accounts work?
A forced savings account functions in similar fashion to an ordinary savings account. Depending on the financial institution that you have chosen to open the account with, you could be required to be a pre-existing member and also have a transaction history with the account. This enables you to make deposits into the savings account.
Although different forced savings accounts do function differently, most of them aim at helping members keep the account for as long as possible so as to save money.
Some accounts will require you to make high amounts of regular deposits and in turn reward you with higher interest rates.
For instance, if you make a minimum $200 monthly deposit, you will stand to benefit from a greater interest rate. Failure to meet the deposit plan results to a lower interest rate.
In other accounts, members are forced to save by having stiff withdrawal penalties. It means that you will be penalized every time that you withdraw money from that account. Other banks also penalize you by denying you bonuses or high interest rates if you withdraw.
You can think of forced saving accounts as reward accounts that have penalties meant to force you to save.
How to Implement a Forced Savings Plan
Get a forced savings account that fixed deposits
In order to implement a forced saving scheme, the first thing to do is to get an account that will demand that you make fixed monthly deposits. Usually, if you do not make the payments you are penalized. A bank that charges stiffer penalties is even better.
Look for banks that have very strict policies on savings. Also, look for banks that incentivize you in case you reach a monthly target. Some banks will offer higher interest rates for those that meet the monthly saving and deny you the high interest rate if you don’t meet their required savings amount.
Automate your savings plan
Another tip to help you save for your future is by ensuring that the money gets to be deposited in your account directly. Automated saving means that every month, a certain amount of money is deposited directly into your account. It is like a deduction for loan repayment.
This way, you won’t miss a single payment session because you don’t have the chance to choose between whether to save or not. With time, you will get used to the fact that a certain amount of your salary goes to your saving, which helps you become better at saving.
Choose accounts that penalize you for withdrawals
Once you have made efforts to ensure that you save every month, the next thing is to make sure you do not withdraw the amount that you have saved. One of the ways to do this is to work with forced savings accounts that impose a penalty for withdrawals that you make. It some charge very high penalties and all of these are aimed at discouraging you from withdrawing the amount that you have already saved.
Save your windfalls after you have paid down your debts
In case you receive a windfall, pay your debts first and then save what remains. Windfalls can really help you make a significant progress towards your saving goal. Take full advantage of unexpected amount of money like inheritance, a raise or a gift among other things.
How to get the best from forced saving accounts
Meet deposit and minimum balance requirements
Most of forced deposit accounts will require that you make a certain minimum deposit into your account. Some require that you maintain a minimum balance. If you open one of such accounts, you must be prepared to meet these requirements. This is because failure to doing so will result to missing on benefits or being hit with extra fees.
Don’t put too much into the account
With forced saving accounts, the more you deposit, the greater your savings will grow. But you need to remember that once you make these deposits, you won’t be able to access them. If you do, you will have to contend with very high penalties.
Before you put money into these accounts, you need to first ensure that you have set aside enough money to meet your everyday expense needs. This ensures that you do not get penalized and also make the most of your forced savings accounts.
You also need to remember that most accounts that have bonus interest tend to have caps. Once you reach these caps, the interest rate will decrease. This cap often lies in the region of $200,000-$250,000 mark in most banks. So you won’t be gaining a lot if you continue saving a lot of money despite reaching the set limit.
The first step to securing your financial future is to start saving. But saving itself is not often easy. Many people simply cannot keep up saving every month because there is nothing that forces them to save. Also, too many times, you will be faced with temptations that force you to dip into your saved fund.
To ensure that you save money every month and don’t go back to withdraw the money, you need to consider forced saving. This type of saving scheme encourages you to save monthly by imposing severe penalties to you if you don’t.
The accounts also offer attractive interest rates to encourage members to save more. And to dissuade people from withdrawing what has been saved, some accounts also impose penalties for every withdrawal.