Low-Income Earners: If You Want to Be Financially Independent, You Need to Automate Your Savings

If you earn a low income or if you’re living paycheck-to-paycheck, automating your savings can seem pointless because you have so little leftover after you pay your necessary expenses. However, automating your savings can make a significant positive impact on your finances, even if it means only saving a few dollars per paycheck.

Automating your savings is such a powerful tool for low-income earners in particular because it removes inertia and eliminates present bias, which often prevents low-income earners from saving money. Here are three reasons why automating your savings is so effective:

Automating your savings removes savings inertia and builds consistency and momentum.

One of the biggest reasons why people struggle to save and invest is the belief that saving a few dollars at a time isn’t enough to make a meaningful impact on their savings and investment goals. In other words, people often delay saving and investing because they believe that the little money they have is not enough to save or invest. This delay is called savings inertia.

According to one survey of 2,020 people by Business Insider, 41% of people do not currently invest their money. Of those people who do not hold investments, 50% are waiting until they earn more to start investing.

That decision to put off saving and investing is a mistake. Waiting to save and invest until you start making significant amounts of discretionary income means that you might end up missing out on tens of thousands of dollars or more in compound interest, which is why it’s so important to invest consistently even if you don’t think it will make a difference.

Automating your savings and investment contributions is the best way to remove savings inertia and build the consistency and momentum you need to reach your financial goals.

Consistency and momentum are key to building a robust emergency fund and retirement account balance. Even investing 1% more of your income could generate tens of thousands of dollars in compound interest over the long-term if you invest consistently—even if you’re a low-income earner.

No matter how small your investment contributions are, just know that you are still making progress toward your investment goals and your contributions have the potential to generate tens of thousands of dollars or more in compound interest.

Automating your savings and investments helps remove the inertia that comes from believing that you don’t have enough to make saving or investing worthwhile. Automating your savings is a powerful wealth-building tool because it removes the option to be inconsistent about your savings and investing goals.

Automating your savings eliminates present bias.

Present bias is one of the main reasons why people struggle to save for emergencies and retirement. Present bias is the idea that your current wants are more important or more urgent than your future needs. Present bias makes you prioritize your immediate needs and wants to the detriment of your future needs and wants.

Present bias disproportionately prevents low-income earners from saving money, which is why it’s so important for you to automate your savings if you earn a low income. A 2021 study on the relationship between income levels and savings automation notes that:

Automation…promotes increased savings rates for low-income individuals[] because automation removes the cognitive process from savings and makes it automatic. Low income individuals may have perceptions of scarcity and focus their cognitive efforts on these concerns (Mullainathan and Shafir 2013).

When resources are limited, the context of scarcity shapes one’s choices and behaviors by orienting the mind automatically to unfulfilled immediate needs (e.g., food and shelter). Thus, for lower-income individuals, their cognitive resources may be depleted (Mani et al. 2013), and they may benefit more from automation than individuals with higher income.”

In other words, automating your savings eliminates present bias because it forces you to prioritize your financial future—if some of your money is automatically deposited into your savings account instead of your checking account, then it seems like spending that money isn’t an option. Automating your savings allows you to naturally adjust your spending habits to the money that’s just in your checking account.

Automating your savings means you’ll save more money.

Failing to automate your savings and investments could cause you to not save or invest enough money. According to Bankrate’s 2024 Annual Emergency Savings Report, 66% of Americans could not pay for a $1,000 emergency from their savings account, and a 2024 study by Clever Real Estate notes that retirees have a median balance of $142,500 saved for retirement, which is at least “4x less than the recommended minimum for starting retirement ($572,000).”

The situation is even worse for women retirees, who have a median of $100,000 saved for retirement—less than half of what men retirees have saved ($217,500). And those nearing retirement aren’t faring any better than current retirees: Prudential Financial’s 2024 Pulse of the American Retiree Survey reports that

“Fifty-five-year-olds have median retirement savings of less than $50K, falling significantly short of the recommended goal of having eight times one’s annual income saved by this age.”

A conference paper for the Wharton School of Economics’ 2024 Pension Research Counsel Symposium found that automating your savings is one important solution to the savings and retirement crises. According to the paper, twenty years of research shows that automating your savings is associated with increased savings rates and higher savings and retirement account balances.

Automating your savings can help you combat the emergency savings and retirement crises even if you’re a low-income earner.

A 2020 study shows that earners with incomes below $35,000 benefit the most from automating their savings: the study found that median-income and high-income earners only benefited from automating their savings if they didn’t have a savings mindset, whereas low-income earners benefited from automating their savings regardless of whether they considered themselves to be savers or spenders.

The study found that “savings automation has a significant and positive effect on liquid savings at levels of income below…approximately $35,000.” The study even found that low-income individuals who made $20,000 or less were able to save more money if they automated their savings than if they didn’t automate their savings.

This means that if you’re a low-income earner or are living paycheck-to-paycheck, you absolutely should be automating your savings and investment contributions, even if you can afford to only contribute a few dollars per pay period. Automating your savings and investments can increase your emergency savings and help protect you from approaching retirement with insufficient funds in your retirement account.

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For low-income earners, savings inertia and present bias are significant barriers to saving and investing, which is why you absolutely need to start automating your savings and investment contributions even if you can only afford to contribute a few dollars per paycheck to your savings and investment accounts.