Paying yourself first – MoneySense

Video: Why open a high-interest savings account?

Step 4: Automate the deposits

There are a couple of ways to make your savings payments simple and automatic. One is to set up a recurring monthly transfer from your chequing account to a high-interest savings account, as follows:

  • Log in to your online bank and choose “transfer funds” from the menu.
  • Input the amount you want to save each month.
  • Specify which account the money should be taken from (chequing) and the account you want it moved to (savings).
  • Select the date you’d like the first transfer to happen. It’s best for it to be shortly after payday, and as early in the month as possible. So, for example, if you’re paid on the 1st and 15th of each month, you might set up your transfers for the 3rd of the month. That allows enough time for your pay to clear, but very little opportunity to spend that cash before it is whisked away to your savings account. 
  •  Choose the frequency option “once a month”
  • Indicate an end date, or how many times you want the transfer to take place (for example, if you want your monthly savings to remain unchanged for a year, you’d choose 12 times).

Of course, you can always log into your account at any time to make changes to upcoming transfers. If an unexpected home repair or other emergency expense comes up, you can consider decreasing or temporarily holding off on your automated savings.

Similarly, you can—and probably should—increase the amount of your automated transfers to your savings account whenever you get a raise. That way you’ll make sure to set aside that extra money for your targeted goals rather than succumb to lifestyle creep.

If you’re paid by direct deposit, you could also ask your employer to deposit a specific portion of your pay directly into your savings account. Some people prefer this method because it takes an extra step—contacting your employer’s payroll department—to make changes to their savings plan, whereas they might feel it’s too easy to cancel or reduce their savings transfers via online banking. 

Step 5: Open the right accounts

Now that you’ve gotten into the savings habit, you can open the appropriate accounts to house those savings. For example, if you’re saving for a short-term goal like a wedding, a Tax-Free Savings Account (TFSA) is a good choice (if you have available contribution room) because you can withdraw the funds at any time without penalty and you won’t pay income tax on the interest you earn—which allows your savings to grow even faster. 

For retirement savings, a Registered Retirement Savings Plan (RRSP) savings or investment account is ideal, since your contributions are tax deductible—giving you even more money to sock away—and the interest or investment income on your savings will grow tax free until withdrawal.

A word of caution

The pay-yourself-first strategy only works if you are living within your means. If you rely on a line of credit or carry a credit card balance to fund your lifestyle, you won’t benefit from automated savings. While you might enjoy watching the balance in your savings account grow, the high rate of interest charged on your debt will wipe out any savings gains, and then some.

If you have outstanding credit card balances or other high-interest debt, you can still use the pay-yourself-first method, but your automated transfers should be made toward your credit card or other loan accounts rather than to savings. Once you’ve paid off the debt, you can then redirect the monthly transfers to your savings accounts.


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