What It Really Means to Pay Yourself First

By the Inspired Investor teamDecember 22, 2022

Learn more about a strategy that lets you work toward your goals with minimal on-going effort, leaving you time to focus on other things.

When a plane is on autopilot, it’s not exactly flying itself, but it’s set to maintain a course or altitude while the pilot concentrates on other details of operating the aircraft.

The same idea can apply to saving or investing. With pre-authorized automatic deposits into an investment or savings account on a set schedule, you’re applying a “set it and forget it” strategy to your finances. Much like the plane’s pilot, this allows you to work toward your goals with minimal ongoing effort, leaving you the time and energy to focus on other things.

A pre-authorized contribution plan, sometimes referred to as a PAC, is an automatic contribution to an account of your choice – typically your RRSP, TFSA, RESP and/or another 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.

What are the benefits of a PAC? You can:

1. Take Control and Free Up Time

Everything about a PAC is within your control, from the frequency of your contributions (you can opt for weekly, every 2 weeks, twice a month, monthly or quarterly) to the amount you contribute (you can decrease it or increase it at any time). You can also stop and restart a PAC as needed, eliminating any concern about getting “locked in” to a plan.

Stress- and effort-free saving is a massive benefit to setting up a PAC. There’s no shame in this, but let’s face it, it can be easy to forget to tackle savings each time a paycheque hits our account. A PAC is like a personal savings assistant who helps keeps you on top of your goals.

2. Reach Your Goals Faster

Perhaps the most compelling upside of a PAC is the ability to help reach your savings goals faster. Building your savings through regular contributions 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.

3. Reduce Your Risk

PACs are also a way to take advantage of dollar-cost averaging (DCA), a simple investing strategy that can help you reduce the risk that comes with trying to time the market. By putting a fixed dollar amount toward your investment fund on a regular basis (say $25 month), you may pay more for investments some months (when markets are up) and less during others (when markets are down), but overall, the total cost will typically end up being less than if you contributed in one lump sum.

Financial professionals often say most people spend their money in this order: bills, fun, saving. A PAC can help you prioritize savings while still keeping aside some discretionary funds for the “fun” part.

PACs in action

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 in order to reach a goal.

For example, imagine you’re hoping to buy your first home in the not-too-distant future—say, three years from now—and you have determined you’ll need to save $20,000 toward a down payment. In the calculator, input some quick info such where you live and your annual income. Choose your contribution amount and frequency (bi-weekly is a popular option, but choose whatever works best for you), and your expected annual rate of return. With this information, the calculator can suggest how much you may need to put aside to hit your goal. In this case, with bi-weekly payments and a 5 per cent return, that’s $238 every two weeks*. You’ll also see the growth over time of your cumulative contributions and return.

There’s a good reason we’re often told to “pay yourself first.” It’s a golden rule of savings for one reason: it works. Paying yourself first can make saving like a reflex, as automatic as breathing. And who wouldn’t breathe a whole lot easier knowing there’s a nest egg building for your goals?

*The results generated by the calculator are general estimates only and provided for informational purposes.

Investment advice is provided by Royal Mutual Funds Inc. (RMFI). RMFI, RBC Global Asset Management Inc., Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities which are affiliated. RMFI is licensed as a financial services firm in the province of Quebec.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.