Why save more each month?
Imagine you have 2 saplings to plant.
You carefully select a nice spot in your garden and plant them. Over time you pay attention to the one closest to the house; fertilizing and feeding the soil with plant food, watering it during dry times and carefully pruning it. The other you left to grow on its own still continues to grow, but doesn’t look quite as full and lush as the other tree.
Your savings plan isn’t much different from those 2 trees. You can put some money in an account and hope it continues to grow unattended – or you can invest some regular TLC.
Creating a plan to help grow your savings doesn’t require you to have a green thumb – but it does take a little commitment.
Even if you’re only saving a little, it’s better than nothing. Not only can it help you save for long-term goals like retirement – it can also help you cover emergencies in the short term. According to Statistics CanadaOpens a new website in a new window, 1 in 4 Canadians don’t have enough saved to cover an emergency expense of $500, a financial issue affecting women slightly more than men.
To avoid this concern, it’s good advice to make regular saving part of your monthly budget – even small amounts to start can grow into something much larger when you commit to “paying yourself first.”
Automatic savings contributions
Once you have a budget made, working with your advisor, you can set up a monthly pre-authorized chequing (PAC) contribution plan to automatically grow your savings.
By creating a PAC, you can take advantage of compound growth and avoid the annual stress of finding money to contribute to your Registered retirement savings plan (RRSP), before the tax filing deadline.
Reduce your income taxes
When you’re ready to set up automatic contributions, you’ll need to decide where to invest them.
While non-registered accounts are an option, the most popular are Registered Retirement Savings Plans RRSPs and Tax-free savings accounts (TFSAs). Both options are government programs that provide tax-advantaged savings.
Depending on your situation and stage of life, you may want to explore the benefits of each and talk to your advisor about how they can work together to increase your savings – and tax benefits.
Value of compound growth
By setting up automatic contributions, you’re on your way to growing your savings. Compound growth can help your money grow even faster and works similar to compound interest.
With compound interest, you’re potentially earning interest on interest. You could earn interest on the money you put in at the start, as well as the money you add later, plus on all the interest that collects over time.
This may give you a larger total amount to earn future interest on, leading to even more growth. Over time, you have a powerful recipe to help grow your money.
Free money – Employer matching programs
Do you have an employer-matching contribution program at work? Many companies offer this benefit to support and help employees plan for their retirement. When you enrol in these plans, you are essentially getting free money – which will go into your savings and help boost your opportunity to benefit more from compound growth.
Saving early, and saving often, can also help you avoid those crunches when it’s time to set aside money for your annual RRSP contribution. With just a small amount going into your plan monthly, your savings may grow through the benefit of compounding. This is something those annual lump-sum contributions just before the RRSP season cut-off don’t take full advantage of.