How pre-authorized contribution plans (PAC) can help you reach your financial goals

Saving consistently can feel challenging, especially amid rising costs. Luckily, there are some strategies you can use to help boost your savings, such as paying yourself first.

This straightforward idea involves setting aside money for savings before you do anything else, like paying your bills or dining out. This approach turns saving into a habit, making it easier to build your savings over time.

One way to do this is through pre-authorized contribution (PAC) plans, which allow you direct money from your bank account into an investment account on a regular basis. Even small amounts can make a big difference in the long run.

Here are some of the advantages of PAC plans:

PACs offer stress-free saving

Saving for goals like retirement, your child’s education or a home renovation can feel overwhelming, especially while balancing other expenses. You can help reduce that pressure by automating your savings with a PAC to direct money into your Registered Retirement Savings Plan (RRSP), Registered Education Savings Plan (RESP), Tax-Free Savings Account (TFSA)  or First-Home Savings Account (FHSA).

Regular contributions can help you stay on track toward your goals without having to think about how much you should save each month. Because contributions are automatic, a PAC can also help reduce the temptation to spend money before it’s saved or invested.

PACs can help you reach your savings goals faster

When it comes to investing, consistency can matter just as much as the amount you contribute. Over time, compounding can help those regular contributions grow by earning returns on your returns.

If you’re earning an annual interest rate of 7% and don’t make any new contributions, your money could double about every 10 years; that’s how the power of compounding can help your portfolio. When you set up a PAC to regularly contribute to your investments, you can give your money more time to benefit from that effect. Even small amounts today can make a big difference over time.

For example, if you started investing $100 a month at age 30 and with an average return rate of 5% a year, your savings would grow to about $110,000 by the time you turn 65, despite only investing $42,000. 

Take control of your finances and budgeting with PACs

A major benefit of PACs is that it removes the temptation to spend that money. When you set up a PAC, you’re less likely to use money meant for savings on other expenses because the money is already allocated toward your investments. Over time, paying yourself first can help make saving feel more automatic and less stressful. Plus, you can change the allocation of money in a PAC over time as your needs change or as your income rises.

This flexibility can make a PAC easier to maintain as your income, expenses or financial goals change.

The tax benefits of PACs

Setting up PACs can also help you lower your tax bill. By making regular RRSP contributions with a PAC, you can make the most of your available contribution room in your RRSP, which could potentially help you reduce payable tax or even receive a tax refund.

The same approach can help you make use of the tax benefits from your other registered accounts, such as tax-free or tax-deferred growth. However, it’s important to be mindful of contribution room limits. When you set up your PAC you could face monthly penalties on any excess contributions if you exceed your available contribution room.  For example, overcontributing to your TFSA can trigger a penalty of 1% per month on the excess amount until it’s withdrawn.

PACs can make contributions easier to manage, but it’s important to keep track of your annual limits to avoid overcontributing.

PACs can help you lower your investment costs

Dollar-cost averaging is another benefit of PAC plans. When you invest the same amount at regular intervals, you may lower your average cost per investment, regardless of which direction the market or a particular investment is going.

Another benefit of dollar-cost averaging is that you can avoid investing all your money at once when prices may be high or markets are volatile. Because PACs happen automatically, they can make it easier to stay consistent without trying to guess the best time to invest. This approach can help you stay on track and support long-term growth without having to revisit your decisions each month.