Things are always changing, and even though we don’t know what's coming, we can do small things every month to ensure that we are prepared for the future. Financial goals can feel overwhelming but breaking them down into smaller steps can help reaching them more manageable. Even smaller amounts being put away regularly will add up to big amounts over time, making pre-authorized contributions a great way to automate your monthly savings and reach your financial goals. Planning for tomorrow is made easier with this regular savings plan.
With a pre-authorized contribution (PAC), a pre-arranged amount of money is withdrawn from your chequing account consistently and directly deposited into a savings or investment account. You can decide how much and how often these withdrawals happen. Automating your savings makes it a stress-free plan. You don’t have to worry about remembering to transfer between accounts and you have peace of mind knowing that you are putting money away to secure your future.
When you get into the habit of saving, it not only becomes easier, but you’ll notice how quickly the dollars start to add up.
Building a PAC into your budget is an easy way to pay yourself first. A PAC will give you confidence that you are investing in your future and not spending those dollars on other things today. You also don’t have to worry about missing a transfer, because once you set it up, it continues automatically!
One of the best reasons to set up a PAC is that compound growth is similar to compound interest. When you contribute only once or twice a year, your dollars may not be working as hard for you as they could.
Let’s put it this way: starting in January you put $100 into your bank account each month and you get 2% annual interest in your high interest savings account. By the end of December you will have made over $11 in interest and have $1,211 in your account. On the other hand, if you decide to wait until your end-of-year bonus and put $1,200 into the account in December, you will have $1,200 in the account. It might not seem like much but the more you save, the more you’ll earn on interest – and over time it adds up!
Dollar Cost Averaging
There are other benefits to putting dollars away frequently into investments such as mutual funds and/or stocks. In the long run you end up benefiting from an average purchase price (also known as dollar cost averaging). When you save up and try to time the market to buy low, you can reap the benefits, but this isn’t always possible, and you could end up buying high instead. If you are putting money into your accounts each month, you might buy some units when the price is higher but also when they are at their lowest. This is a better investment strategy in the long run to reach your financial goals.
The average price of the fund paid is $20. If the price moves to $25 when you want to sell, you will then have 80 units now worth $2,000 (80 x 25) instead of your initial cost of $1,200.
Some accounts, for example RRSPs, have matching programs through employers. Instead of waiting until the end of the year to ensure you have saved the amount your employer will match, you should put money away each month. If your employer will match $2,500, don’t wait until the end of the year and risk being stressed because an unforeseen expense came up last minute. Work backwards and break up the match amount throughout the year. In this example, if you put away $210 a month you would guarantee all the benefits from the matching program.
Using a PAC is one of the most efficient and effective ways to save. They are simple to set up and give you peace of mind for your future, which is priceless. Speak to an advisor today to set up this small but valuable way to reach your financial goals!
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