Paying Yourself: How Pre-Authorized Contributions Can Help You Save

The phrase “Pay Yourself First” has been around for over a century, but it’s had some serious staying power. American entrepreneur George Samuel Clason coined the phrase. He suggested the 50/30/20 rule of managing money: 50 percent of your income should go towards your expenses and needs, 30 percent of your income should go towards discretionary spending, and 20 percent—the “paying yourself” part—should go towards saving for the future and a rainy day.

Back in the 1920s, when Clason authored this advice, paying yourself might have looked like putting money aside in a jam jar or lining up at the bank to deposit your money every time you got paid. Now, it’s easier than ever to set up automated savings and investing, also known as pre-authorized contributions (PACs). A PAC can allow you to set aside an amount of money at the frequency that works for you, taking much of the work and stress out of planning for your financial future.

What is a pre-authorized contribution, and how can it help you save?

Just like you may have set up automatic bill payments for your water bill or your cell phone, A PAC is similar. But, instead of paying the utility company, you are paying your future! Your savings or investments are automatically deducted from your account on a pre-determined frequency and automatically deposited to an account (or accounts) of your choice. You can set up your pre-authorized contribution to your RRSP, TFSA, RESP, FHSA, and/or another non-registered investment account. The contribution generally comes from your chequing or savings account, and once set up, the funds are transferred without any additional effort by you — nothing to remember, nothing to click, nothing to do at all. You can decide how much and how often the money is transferred.

What are the benefits of a pre-authorized contribution?

Besides the ease of “setting it and forgetting it,” a PAC offers benefits, such as:

A PAC frees up your time

A PAC is an automatic deposit, so you don’t have to remember or stress. And if you worry about a time when the PAC you’ve set up no longer works for you, you can stop and restart or modify your PAC as needed, eliminating any concern about getting locked into a plan.

Life gets busy, and it can be easy to forget to tackle savings each time a payroll deposit hits your account. A PAC is like a personal savings assistant that keeps you on top of your goals.

A PAC allows you to take control over how you invest

When you set up your PAC, you choose your investment account, and what kinds of assets you invest in.

With the help of a financial advisor, you may wish to determine investment options that are right for you and your financial goals. For example, if you are saving for a new automobile, a Tax-Free Savings Account (TFSA) may be useful. Depending on your risk and time horizon for saving, there are many investment vehicles to choose from, such as mutual funds or Guaranteed Income Certificates (GICs).

Note that some investments, such as mutual funds, can be an automatic investment. Others, such as GICs, will require you to purchase the asset.

A PAC allows you to harness the power of compounding

Perhaps the most compelling upside of a PAC is the ability to help potentially reach your savings goals faster. Building your savings through regular contributions to investments means you earn money on your initial deposit AND on the money you’ve made on your earnings – thanks to the power of compounding. This is the case regardless of how big or small your regular contribution is.

Imagine you make an initial investment of $1000. At the end of the year, with a 4 per cent return, you would have $1,040; your return on investment is $40. At the end of the second year, a 4 per cent return on $1,040 is $41.60, making your investment now $1081.60.

To supercharge that growth, add a monthly PAC of $50 to your initial investment of $1,000. Now, at the end of the second year, you have $2,330. Not only have you saved more, but the interest you’ve earned is also more.

A PAC may help you lower the overall cost of your investments

PACs are also a way to take advantage of dollar-cost averaging, a simple investing strategy that can help you average out the price of your investments over time. Markets and the cost of investments fluctuate; sometimes they are high, and sometimes they are low. By putting a fixed dollar amount toward your investment fund on a regular basis (say $50 per month), the price of the shares you purchase may go up some months (when markets are up), and the price may go down during others (when markets are down). This allows you to average out the cost rather than trying to time the market (which can be notoriously difficult to do). Dollar-cost averaging can help you focus on time in the market, not timing the market.

A PAC can help take the emotion out of saving and investing

Emotions can play a big role in investment. Fear, anxiety, and even excitement can all play a role in your investing decisions. These emotions can cause you to be prone to noise and headlines, and your brain may cause you to make decisions based on fear and regret.  Having a PAC can take these emotions out of the equation, as you are taking a dollar-cost averaging approach. When your contributions are automated and scheduled, you can focus on your goal, not on whether the markets are up or down or what the headlines are saying.

How can I start a PAC?

To set up a pre-authorized contribution plan, you first need an investment account with RBC. If you haven’t opened one yet, you can do so online, by phone or in-branch. Once you have an account, it’s easy to set up your PAC through your online banking, your banking mobile app, or through your branch or advisor. An advisor can be an invaluable tool to help you determine which investments and accounts are right for your goals.

If you are considering a PAC, you may also wish to speak with an advisor. They can help you make decisions about your PAC and your investments based on your cash flow, risk tolerance, and financial goals. You can book an appointment directly through online banking or your mobile app. 

How much can I save with a PAC?

Want to see a PAC in action? Try this pre-authorized contribution calculator to see how saving regularly can help you reach your goals. You can calculate how your savings could grow with regular contributions or how much you need to save to reach your goal.

For example, imagine you’re hoping to buy your first home in the not-too-distant future. In the calculator, input some quick info, such as where you live and your annual income. Choose your contribution amount and frequency and your expected annual rate of return. With this information, the calculator can suggest how much you may need to put aside to save up that down payment. Remember that certain registered accounts have contribution limits that may limit the amount you can put aside every year or over the account’s lifetime.

What if I have questions about a PAC or my finances?

An advisor can help to look at your financial picture. They can assess your cash flow and suggest how much and how often you are able to save. Most importantly, they can help you define your financial goals and provide some investment options based on your risk tolerance and time horizons. If you have questions about whether a PAC is right for you, reach out to your advisor. 

There’s a good reason why “pay yourself first” has endured: it works. Paying yourself first can make saving like a reflex, and today it’s easier than ever to do with tools like PACs.