The Benefits of Automatic Savings Plans

Craig Sebastiano
by Craig Sebastiano March 8, 2016 / No Comments

Every year, many retirement surveys show Canadians say they find it hard to save money. But there’s an easier way by setting up an automatic savings plan. Saving money automatically forces you to live on a smaller amount and can help you reach your financial goals.

How it works

Setting up an automatic savings plan is actually pretty easy. How much you want to save is up to you.

You can easily do this yourself by making regular weekly, biweekly, or monthly transfers to a high-interest savings account or an investment account, such as an RRSP or TFSA. Last week, online investment manager Wealthsimple reduced the minimum investment requirement for clients to $0 from $5,000 so now there’s no excuse not to save.

Your company may also offer a pension plan or group RRSP, which you can make automatic contributions to each time you get paid. Many employers with group RRSPs also offer a company match. Your organization might give you $50 for every $100 you contribute, which is free money and equals a guaranteed 50% return. There aren’t any other investments that offer such a great guaranteed return.

Why it works

Putting away amounts of money automatically starts to add up over time. Let’s assume you save $50 a week in a savings account (that $50 could equal what you spend on lunch each week). After one year, you’ll have saved $2,600 before interest, which is a good start. In 20 years, you’ll have socked away $52,000, which is huge accomplishment!

Automatic savings works because you don’t have to think about how much you need to save. It can also help you achieve a number of financial objectives, including:

  1. Saving for a down payment on a home—A home will likely be the biggest purchase you’ll make in your lifetime. If you’re able to put down a larger down payment, your mortgage will be smaller and you’ll have to pay less interest.
  2. Creating an emergency fund—It’s good to have a safety net in place due to unforeseen circumstances. You should set aside some money in case you become ill, lose your job, or have unexpected home repairs.
  3. Saving for retirement—Contributing to an RRSP or TFSA will allow your investments to grow tax-free, which will help your retirement savings grow faster. And if you make an RRSP contribution, you should receive a tax refund, which you can put back into your RRSP and increase your savings.
  4. Saving for your children’s education—Use an RESP to take advantage of the Canada Education Savings Grant (CESG). The government will give you 20% of the amount you contribute to an RESP up to a maximum of $500 annually. The lifetime maximum CESG you can get is $7,200 per child. That’s free money from the government just for saving for your child’s post-secondary education.

The bottom line

Forcing yourself to save automatically is the best way to save. After all, you can’t spend what you don’t have.

Tips for saving more

  • If there’s a certain amount of money you want to save but think it’s impossible to do so, start saving with a small amount and ramp up the amount over time. For example, start with $25 a week, then $30 a week, and so on.
  • If you want to save $200 a month, consider saving $50 a week instead. If you save monthly, you’ll have put away $12,000 after five years (before interest) but if you save weekly you’ll have saved $13,000. That’s an extra $1,000!
  • As your salary increases, so should your savings. If get a new job and earn $100 more each week, consider saving at least 10% of that amount or an additional $10 a week.

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Flickr: KMR Photography