Four Easy Ways To Save Money Each Month
Fee-for-service financial planner and founder of PlanEasy.ca
There are lots of easy ways to save money each month but these four are probably the easiest.
Saving and investing on a regular basis is a key way to achieve financial goals. Creating a strong habit is important to accumulating a significant amount of wealth. Without a regular habit of saving and investing it can be quite difficult to make significant progress.
Even a small change can have a significant impact if it’s done consistently over a long period of time. There isn’t a big difference between financial success and financial stress. Even as little as $10/day can have an enormous impact over the course of a few years. Extrapolated over decades the difference is staggering.
Thankfully with technology this can be made quite easy. There are a few simple ways to save money each month. And accounts like the TFSA and RRSP make that even easier. They allow contributions to compound tax free, providing a significant boost to savings and investments.
There are a few easy ways to save money each month. The four ways we’ll focus on in this post all use automation. They take advantage of programs or systems that already exist. This helps make it easier to setup and maintain a healthy savings habit.
Automation is great, it helps maintain a good habit, and it makes it easy to “set it and forget it”. Best of all, automation means that we typically don’t even see this happening each month. By automating contributions to savings and investments we hardly miss the money being funneled away for future goals.
Employer Retirement Savings Plan
Probably the easiest and best way to automated savings and investments is to take part in an employer retirement savings plan. These plans can differ from employer to employer but they usually take the form of a defined contribution pension plan (DCPP), group RRSP (G-RRSP) or a defined benefit pension plan (DBPP).
These types of plans typically require employee contributions as well as employer contributions.
The DCPP and G-RRSP often have a matching component where an employee contributes a certain percentage of their salary and the employer matches at a rate of 50%, 75%, 100% etc. For example, the employee may contribute 6% of their salary and the employer matches at a rate of 50%, so the total contribution is 9% of salary.
These types of employer retirement savings plans are one of the easiest ways to save money each month and the matching component makes it even more attractive.
Despite how attractive employer retirement savings plans are some people still do not participate in their employer plans.
If you have the option to participate in an employer sponsored retirement savings plan, especially one with a matching component, then you should absolutely take advantage of this benefit!
The final benefit of an employer retirement savings plan is that contributions are made pre-tax. With pre-tax contributions your employer will lower the income tax being withheld on each paycheck. This means your money works harder for you because its not sitting with the government for 6-12 months eventually waiting to be paid back in the form of a tax refund.
Automated Payroll Deductions
Even if you have an employer sponsored retirement plan there may be an opportunity to make additional voluntary contributions through automated payroll deductions.
Automated payroll deductions are a simple way to save money each month. It takes advantage of the infrastructure already set up by your employer.
Deductions are made from your paycheck each pay period. These deductions are made automatically so there is no need to do anything. This type of automation makes saving money easy.
With automated payroll deductions money is taken off of each paycheck before it’s deposited in your checking account. Out of sight, out of mind.
Once set up, automated payroll contributions are a great way to make contributions to savings/investments without having to worry about accidentally spending that money.
Automated Investment Contributions
Automated investment contributions are an easy and efficient way to grow your investment portfolio. Unlike the options, above this option doesn’t rely on your employer, so it’s perfect for those who may not have an employer sponsored retirement plan. This can also be an option when your employer sponsored retirement plans are less attractive due to high fees or decreased flexibility.
Setting up automated investment contributions will be different depending on how you’re investing and the type of investments you’re using.
Setting up automated investment contributions is actually easiest with a low-cost mutual fund portfolio. Because of how mutual funds are set up they allow for systematic investment plans (SIPs). These plans allow for small investments to be made on a regular basis (sometimes as little as $25 to $100 per contribution). Mutual funds can be purchased in fractional units which makes it easy to invest small amounts on a regular basis. This is great for beginner investors who may only have $25-$50 per month to contribute.
Setting up automated investment contributions becomes a little bit harder with investments like ETFs (Learn more about what an ETF is). Most brokers allow for automated contributions to an investment account, but not necessarily automated investments. Your broker can be set up as a bill payment and contributions automated through your bank account. But investing these automatic contributions still need to be invested manually unfortunately. In most cases ETF purchases cannot be automated.
The exception for ETFs is when an ETF is eligible for a PACC. PACC stands for pre-autorized cash contribution and it allows ETF purchases to be automated. Once set up, it allows ETFs to be purchased automatically each month. Unfortunately only certain ETFs are eligible for PACCs (here is an example for Blackrock ETFs) and it’s not possible to purchase fractional ETF units, so there may be cash left over in the account each month that will not be automatically invested.
Automated Savings Contributions
These types of savings goals can be automated through monthly contributions to a separate savings account.
These contributions are automated through your bank account by using pre-set transfers on whatever frequency makes sense for you. These contributions can be set up weekly, bi-weekly, monthly etc.
The best way to set up automated savings contributions is to line it up with your pay frequency. Set up your automated contributions to come out the day after your paycheck is set to be deposited.
By having savings contributions come out automatically and in-line with your pay periods will help ensure these funds don’t sit around in your checking account (and perhaps accidentally get spent!).
Tip: Separate Savings Accounts
One tip for automating contributions to a savings account is to set up a separate savings account for each savings goal. (How to manage your money, made easy)
Common savings goals include…
- Saving for infrequent expenses (vehicle repair, vehicle upgrade, home repair etc)
- Saving up an emergency fund
- Saving for a down payment
- Saving for infrequent purchases (vacations etc)
These individual savings accounts can help you separate your savings goals and keep track of them more easily. This can help if you are the type of person who likes to separate things for organizational purposes.
Online no-fee banks like Tangerine allow for up to 9 separate savings accounts to be set up and named individually. This is a great way to keep track of your savings.
Easy Ways To Save Money
The best and easiest ways to save money each month are all automated. By setting up automated contributions you’ll be left with a slightly smaller amount to spend each month but you’ll quickly adjust your new spending level and before long you’ll hardly notice a difference.
It’s simple yet effective. And over a long period of time it’s incredibly powerful. Saving just a few hundred a month might be all it takes to reach financial freedom.
Accounts like the TFSA and RRSP make this even easier by allowing contributions to compound tax free over a long period of time.
Setting up this automation is the easiest way to save money each month.
Financial planner, personal finance geek and founder of PlanEasy.