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How Small Steps Can Lead to Big Savings

Last year I made a small change to my diet that ended up having a big impact on my weight and overall health. Changes in habits can also help make a difference when it comes to your money.

Before I get into the money aspect, let me tell you about how changing a morning habit produced big results. Every morning for breakfast, I used to eat a whole bagel with peanut butter or cream cheese – a meal that amounted to about 450 calories.

I wanted to shed a few pounds and so I started by cutting my breakfast portion in half, slicing 225 calories from my diet each day without doing anything extra. By mixing in a dose of daily exercise to complement the reduction in calories, I ended up losing eight pounds in two months.

The fact that it’s become habit should ensure that I keep the weight off for good.

We all know about the latte factor and how our habits, even those small daily purchases, can have a profound impact on our savings. We also know that something as simple as brewing our morning coffee at home can be a pain and so we’d rather spend an extra 15 minutes and $1.80 in the Tim Hortons drive-thru to get our daily fix.

Years ago I figured out that automation and habit can combine to produce powerful results. My morning coffee routine is a perfect example. The coffee maker has a programmable feature so I can make my coffee before I go to bed at night and have it freshly brewed and ready when I wake up in the morning.

The simple habit of preparing my coffee in advance, plus the automation of the delayed brewing feature shaves 15 minutes off my morning routine and likely keeps $500 a year in my own pocket instead of in Tim Hortons’ cash register.

The same rules of combining habit and automation can apply to your savings plans.

Imagine if instead of having income tax, CPP, and EI automatically deducted off your paycheque each month, you were required to pay the government a lump sum at the end of the year. How many of us would have the discipline to set enough money aside to pay the entire amount in full and not have to borrow every year when that big tax bill came due?

The government is smart and makes sure to pay itself first. Why should it be any different when it comes to our personal savings habits?

By deducting $400 per month off your paycheque and investing it in a balanced mutual fund inside your TFSA that earns 6% a year, you’ll end up with $185,000 in 20 years.

I know it’s not easy to find $400 in your monthly budget to allocate toward savings. If you earn $40,000 per year, that’s 12% of your gross income. But it’s a heck of a lot easier when it’s not there to spend in the first place.

That’s the power of automatic deductions. Studies show that you barely notice the money is gone and so you adjust your budget accordingly.

One last note about habits and behaviour. On average, it takes more than two months before a new behaviour becomes automatic. That may sound daunting, but when you commit to small incremental changes it can be easier to manage your expectations and embrace the process.

Flickr: KMR Photography