You've probably heard this phrase before: “Pay yourself first.”
Many people say they’ll save whatever money is left over at the end of the month. Essentially, they agree to pay themselves what's left. As you probably know, the problem with the idea of setting aside whatever is available at the end of the month is that there is a strong temptation to spend on “must have” items. By the end of the month, there is no money left to save.
Making Saving a Priority
Instead of relegating money for savings to what's left over at the end of the month, it makes more sense to make saving a priority. Whether you put money in a savings account to pad your emergency fund, or whether you put it in your retirement account, setting money aside should be the very first thing you do.
Saving money for the future is more important than going out to dinner or buying a new blender. Think about what you want to be able to do in the future. None of that will happen if you haven't set aside money now. Take an honest look at your budget and make changes so that your focus on savings comes before you spend money on fun, but unnecessary, items.
How to Set Aside Money for Savings
One of the best ways to save money is to do so as soon as you are paid. The usual advice is 10% of what you make, but any amount that you can comfortably do is better than not saving at all. Put that money into savings immediately, before you have the chance to spend it.
Put that money in a place that's hard to get to. Having it put someplace that requires time and effort to access will discourage you from turning to the money whenever you think you have an “emergency.” Keep that money somewhat out of reach, and you will have to take a step back and evaluate the situation before you pull it out.
It's usually possible to have your employer deduct money straight from your paycheque and put it into Canada Savings Bonds. That way, you know the money is safe, and that it will grow at a rate that usually beats a “regular” savings account. Plus, it's a little more difficult to access that money.
A better long term idea would be to set up a Tangerine account (Free $50 – Orange Key 35090351S1) or a TD e-Series Fund account and have an automatic withdrawal a day or two after your pay date. It's not your employer sending the money to your account, but an automatic withdrawal means that you don't have to remember to make the transfer each pay period; it's all done for you.
You can also have money automatically transferred into your TFSA and/or RRSP. This way, you get a tax advantage that allows your money to grow more efficiently over time. You'll bank more if you take advantage of the tools the government offers to encourage savers.
It might even make sense to set money aside in an RESP account to help pay for your child's college. I use Questrade (Free $50 in trade commissions) for my family's RESP.
Increasing Your Savings
It's rarely a good idea to just save the bare minimum. When you're first starting out, you might not be able to afford a 10% contribution to any savings. However, as you start earning raises, and as your financial situation improves, you should be able to save more over time. Make it a point to increase your savings with each raise.
Not only will you be able to save more over time, but you will also avoid lifestyle inflation if you bank a large portion of each raise immediately. Lifestyle inflation can result in more consumption and spending, and can cause problems in the future, since the increased spending prevents you from saving as much as you need for eventual financial freedom.
Follow this simple formula, and you will find that your accounts can grow quickly and you won’t likely miss the money. Once you’re comfortable living on the remaining cash flow, you can then accelerate your savings rate by saving the future raises you receive at work. Expand to carefully chosen investments, and you can boost your returns and build a nest egg or emergency fund that can handle just about anything.