Financially Speaking

Canadians have many admirable qualities, but the ability to save isn’t one of them. According to Trading Economics, our household saving rate is 5.8%, which is below our historical average of 7.48%. A 2016 survey by the Canadian Payroll Association found that three quarters of Canadians have saved 25% or less of their retirement goal.

While the high cost of living in some major city centres and stagnant salaries – wages grew by just 1.1% in March year-over-year according to Statistics Canada – make it tough for people to put money away, savings is also a mental game. It’s a lot easier to spend money eating out than to find the willpower to save every month.

There is one sure-fire way to remove the psychological barriers to savings: automate your investments by setting up a pre-authorized contribution (PAC), which takes money out of your chequing account every month and deposits it directly into an investment account.

But before you set up your PAC, it’s good to know why saving is so difficult in the first place.

Saving is harder than spending Most of us don’t have the fortitude to save, and those who do save by focusing on the future. Unfortunately, most of us have trouble thinking that far ahead – but we should.

We spend our windfalls Not only do we not save on a regular basis, but we also don’t save when we get an influx of cash. When people receive bonuses or a gift from family, they tend to spend it because of phenomenon called “mental accounting” which makes people value some money, such as found cash, bonuses, inheritances and tax refunds, less preciously than their income or a child’s education fund. The tendency is to treat “found money” like a lottery win or a gift from parents as “fun money”, but it often shouldn’t be.

We stop saving when we’re in debt Many people simply stop saving when they find themselves in debt – and while it’s important to pay down high-interest debt first, it’s still important to save. Why? Because the car breaks down, the roof leaks and holidays always come around. You have to keep saving to pay off any unexpected expenses.

PACs work because they let us move past our emotional issues, and get money in the bank. Consider creating multiple accounts and give them names such as “Trip to France” or “Car Expenses” – this will trigger the positive aspects of mental accounting, and you won’t dip in and blow those savings on something frivolous.

Then, once you’ve allocated your savings and set them up in sensible investments with regular contributions, and once you’ve paid your bills (which can also be set up on a PAC), the rest of the money is yours. With the right financial plan, you can enjoy your money guilt free, knowing you’re having a bit of fun now, and future fun, too. Your professional advisor can help you make the right choices for today and tomorrow.