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


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 percent, which is below our historical average of 7.48 percent. A 2016 survey by the Canadian Payroll Association found that three-quarters of Canadians have saved 25 percent or less of their retirement goal.

While the high cost of living in some major city centres, combined with stagnant salaries – as of March 2017, wages grew by just 1.1 percent year-over-year according to Statistics Canada – makes it tough for people to put money away, saving is also a mental game. It’s a lot easier to spend money eating out than to find the willpower to save every month. Emotional issues influence whether we save, too, says Dr. Moira Somers, a Winnipeg-based clinical neuropsychologist with a specialty in financial psychology.

There is one surefire way to remove the psychological barriers to savings: automate your investments.

There is one surefire way to remove the psychological barriers to growing your savings: Automate your investments, says Dr. Somers. That involves setting up a pre-authorized contribution (PAC), which takes money out of your regular banking account every month and deposits it directly into an investment account.

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

saving is hard

It doesn’t take a rocket scientist to know that saving is a lot harder than spending. Most of us don’t have the fortitude to save, but those who do save have an ability to focus on the future. A 2011 study found that when people viewed computer renderings of themselves made to look older, they were more likely to save than to take a monetary reward right away.

Unfortunately, most of us have trouble thinking that far ahead. “Is it worth it for you to skip that big steak dinner and instead put $300 away and save for the future? It’s something you have to decide,” says Eric Kirzner, professor at the Rotman School of Management at the University of Toronto.

we spend our windfalls

Not only do we not save on a regular basis, 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 a phenomenon called “mental accounting,” says Dr. Somers.

It 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, she says. “They’ll treat a lottery win or a gift from your parents as fun money, but it often shouldn’t be,” says Dr. Somers.

we stop saving when we’re in debt

Being in debt can also derail savings plans. Many people simply stop saving when they find themselves in debt, says Dr. Somers. While you should pay down high-interest debt first, she says it’s still important to save. Why? Because the car breaks down, the roof leaks and holidays always come around. “People are shocked by Christmas every year – they’re unprepared for it financially,” she says. It’s essential to keep saving to be able to pay off any unexpected expenses.

why pacs work

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, says Dr. Somers.

Then, once you’ve allocated your savings and set them up in a sensible investment 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. Enjoy it, guilt-free, knowing you’re having a bit of fun now – and can have fun in the future, too.