Automate Your Savings
We’ve all heard it before. “Pay yourself first and save the rest”, and “Save 10% of everything you earn” but in reality we also know it sounds a whole lot easier than it actually is.
As Canadians we have many admirable qualities, but the ability to save isn’t one of them. In fact, according to Trading Economics, our household savings rate is 5.8% which is below our historical average of 7.8% and well below that magical 10%. A 2016 survey by the Canadian Payroll Association found that three quarters of Canadians have saved 25% or less of their retirement goal.
The high cost of living together with stagnant salaries makes it tough for people to put money away, but saving is also a mental game. It’s a lot easier to spend money than it is to find the willpower to save every month.
Why is it so hard to save? What are we doing wrong?
Saving is harder than spending – Many of us find it really hard to save. Those that do save, focus on the future. For a lot of us – we have trouble thinking that far ahead. Especially, if we are living pay cheque to pay cheque.
We spend our windfalls – Not only are we not saving on a regular basis, we aren’t savings any influx of cash that we do get. Bonuses, gifts and tax refunds, we tend to view as “fun money” and typically don’t value it as preciously as hard earned money. It’s “found money” and we don’t tend to save it – although we should.
We stop saving when we’re in debt – Many people stop saving when they are in debt. While it’s important to pay down high interest debt first, it’s still important to save. It’s always a good idea to have a little emergency fund to cover unexpected expenses like car repairs and roof leaks.
Now that we know what we are doing wrong, how do we do it right? There is a sure fire way to remove the psychological barriers and hurdles to saving. Automate, by setting up a pre-authorized contribution (PAC) plan, which takes money right out of your bank account on a regular basis and deposits it into your investment account.
PAC’s work because they move us past our emotional issues and get the money into the investment. You can nickname your PAC’s and call them “Trip to Disneyland” – this will trigger the positive aspects of mental accounting. You will be less likely to dip into these savings.
Once you have set up your PAC’s and paid your bills, the rest of the money is yours to spend. With the right financial plan in place you can enjoy spending your money guilt free, knowing that you can have fun now and are saving for your future too.
Everyone is unique and every situation is different. Remember, what works for your neighbour might not necessarily be the best option for you. Your Certified Financial Planner will help you make the right choices for today and tomorrow.
This column is written by Michelle Weisheit CFP, IG Wealth Management and presents general information only and is not a solicitation to buy or sell any investments. Please contact your own advisor for specific advice about your situation.