Automate Your Savings

Why pre-authorized contributions take the emotional baggage out of saving.

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Canadians have many admirable qualities, but the ability to save isn’t high on the list. According to the OECD, our household saving rate (as a percentage of household disposable income) is only 5.8%, considerably lower than that of the U.S., eurozone countries and South Korea. This low rate could be the reason why 44% of Canadian pre-retirees (those aged 55 to 64) have less than $5,000 in savings.

There are several legitimate reasons why people struggle to save, such as the high cost of living (particularly in large urban centres) and wages that have not always kept up with inflation. For example, in 2022, the average salary increase in Canada was 3% and in 2021 it was 2.1% (for non-unionized employees), while the rate of inflation was 6.8% in 2022 and 3.4% in 2021.

In addition to the hard numbers that make saving so difficult, there are also psychological barriers that make it tricky for many people to successfully put money away. We take a look at those barriers to saving and the most effective strategy for overcoming them.

Why saving is hard

It doesn’t take a rocket scientist to know that saving is a lot more difficult than spending. Behavioural psychologists have discovered that we’re hardwired to prefer spending on anything that gives us immediate satisfaction, rather than what is good for us in the long term. Our choices are often made almost as an instinctive urge, rather than reasoned out and made with our best long-term interests in mind.

“Present bias” makes us far more willing to use our income to deliver an immediate benefit — such as a meal out, a new car or a night at the theatre — rather than investing it to provide income for our distant, future selves. The immediate benefit we get from saving for our future is far less tangible (and a lot less fun) than spending on an experience. This alone can make saving extremely difficult.

We’re too busy in the present to worry about the future

Work and families take up a lot of our time, to the point that we hardly have the opportunity to think about our future needs. Our retirement is so distant that all manner of more pressing concerns will take precedent over saving for it.

Also, planning for retirement is time consuming. Setting aside several hours to go over retirement investing options and putting a savings plan into motion can be overwhelming when you’ve also got to get the kids to soccer practice or help your parents work out how to use their new tech device.  

We tend to spend our windfalls

Not only do we struggle to save on a regular basis, we also rarely save when we get an influx of cash. When people receive bonuses or a cash gift from family, they tend to spend it because of a phenomenon called “mental accounting”.

This makes people treat money differently, depending on its source. For example, we consider found cash, bonuses, inheritances and tax refunds to be less precious than our salary or a child’s education fund. A bonus, lottery win or a large gift is often treated as disposable income but it should be treated the same as more “serious” money.

We stop saving when we’re in debt

Many people simply stop saving when they find themselves in debt but it’s important to keep saving, even when you owe money.

That may seem counterintuitive, but the car will break down, the roof will leak and holidays always come around. Emergency expenses often catch people unawares, but an emergency savings fund allows you to absorb those costs without derailing your savings plan or your debt repayment plan. 

The solution to saving reluctance

Psychologists have discovered that we’re more likely to make the responsible choice when it’s also the easy choice. In one piece of research, employees were automatically enrolled in retirement savings and had to actively opt out of the scheme. The researchers discovered that employees who had to opt out of a savings program were 40% more likely to grow savings than those who had to opt in to the same program.

Setting up automatic savings (or pre-authorized contributions — PACs for short) can have the same positive effect. By automatically transferring a set amount of money out of each paycheque, you can grow your savings effortlessly and extremely quickly. Because the money leaves your paycheque almost immediately, it’s never available to you as surplus cash. You can’t lay a finger on it because it’s already left your account.

Another big advantage of automatic savings is that you have full control over them: you set the amount you want to save, on specific dates (normally your payday). You can alter the amount whenever you want or even pause it for a set period of time, if, for example, you have an emergency to pay for, or if your employment situation changes. 

How to start up automatic retirement savings

Your IG Advisor can help you to set up an amount that works with your overall financial plan — one that fits in with your income and your savings goals. They can also monitor the amount, so it remains consistent with your overall goals, as well as recommending how much you should save from any upcoming windfalls, such as a work bonus or an inheritance.

If you’re interested in giving your retirement savings a consistent boost, talk to your IG Advisor today to set up a meeting to start saving automatically. If you don’t have an IG Advisor, you can find one here

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