Automatic savings is the key to success

Written by Tangerine

Monday, April 28th, 2014

 

Imagine it was December 31st and you received a letter from the Canadian Revenue Agency (CRA) asking for $10,000 to cover your income taxes owing for the year. Most people would freak out (understandably). Luckily, that doesn’t happen for the average Canadian because taxes are deducted at source – which is a fancy way of saying that income taxes are deducted from your paycheque all year long.

Because it’s taken in little bits throughout the year, we don’t have a problem paying that large tax bill. The bill is being paid automatically for us.

When it comes to saving for the future, we can learn a real lesson from this. If we’ve determined that we should be saving $5,000 per year, it’s almost impossible to do if we leave it until the end of the year. Most of us simply can’t come up with $5,000 in cash at the drop of a hat. But, if we contribute small amounts regularly throughout the year, it can be relatively easy to save large amounts.

The difference between income taxes and savings is that no one is forcing us to save money. We have to make it automatic ourselves by setting up an automated transfer from our chequing account to our savings account.

The best way to do this is to again take a page right out of the income tax playbook. Since taxes are taken off each paycheque before we even see it, we don’t have the opportunity to spend that money. We can create the same effect by coordinating an automatic transfer to our savings account that occurs on pay day.

Let’s say you decide to save 15% of your gross income (which is what many experts recommend). Gross income means your pay before taxes. If you earn $50,000 per year before tax, that means you plan to save at least $7,500 a year. To do that, simply divide $7,500 by the number of paycheques you receive per year. If you get paid once every two weeks, that’s 26 paycheques in total. $7,500 divided by 26 = $288.46 set aside from each paycheque.

Over 10 years, in a savings account paying 1.5% interest, you’ll have saved more than $80,000.

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