Most of us have heard the advice to pay yourself first. Having your savings come off your pay before you see it is a painless way to save consistently. I have an idea to take this a step further to automate the saving of pay increases and bonuses.
Consider the example of a single 30-year old, Jen, who earns $65,000 per year. Every two weeks, Jen’s take-home pay is $1830 until October when CPP and EI contributions end, and then she takes home $2000. She hasn’t been saving any money and wants to start.
Jen could get her employer to split her paycheque so that a fixed percentage of her take-home pay goes to savings. Another possibility would be for Jen to have $1700 directed to her chequing account, and the balance directed to savings. This has the advantage that her spending is constant all year and the savings level changes when CPP and EI deductions end for her in October.
Another effect of this approach is that her raise next year will get diverted entirely into savings; she won’t see any difference in her level of spending money. In addition, any bonuses added to her regular paycheque will go entirely to savings.
Eventually, inflation will erode the value of Jen’s biweekly $1700 for spending, and she can go back to her employer to have this amount increased. But this is something she will have to take action to do. By default, raises turn into more savings; momentum becomes Jen’s friend.
There are people who won’t be able to use this idea. Highly variable income is a problem, and some savings plans may not be set up to take variable amounts in this way. But for those who can automate their savings with this idea, momentum becomes a driver for increased savings.