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

Saving money every month can feel like a chore, but as life gets busier – and more costly – putting money away is a must. But how can you save regularly when you can barely find the time to do all the other things you need to do in your life? The solution to this challenge might be easier than you think.

If you want to boost your savings, try paying yourself first. This straightforward idea involves setting aside money for savings before you do anything else, like paying your bills or going out for a night on the town. This approach makes savings a habit rather than a burden – and if you do it right, you won’t even notice you’re doing it.

You can schedule automatic transfers to a regular savings account, but if you really want to put your savings to work, consider using a pre-authorized contribution (PAC) plan, which lets you steer money into an investment account like your Registered Retirement Savings Plan (RRSP). Even starting with small amounts can make a big difference in the long run.

Here are some of the advantages of PAC plans:

Stress-free saving

Finding time to save is one thing, but when you know your retirement, your kid’s education or that renovation you so desperately need is at stake, the stress to save will eat away at you the longer you put it off. Alleviate the pressure by automating your savings with a PAC to steer money into a RRSP, Registered Education Savings Plan (RESP) or Tax-Free Savings Account (TFSA). You’ll have greater peace of mind knowing you’re always making progress toward your goals. Best of all, if you can time the withdrawal with receiving your paycheque, you likely won’t even miss the money.

Reach your savings goals faster.

You’ve heard the expression, “work smarter, not harder.” When it comes to savings, the one thing the smart money figured out long ago is the magic of compounding – earning interest on your interest. If you’re earning an annual interest rate of 7% and don’t make any new contributions, you’d double your money every ten years; that’s how compounding can really help your portfolio. When you set up a PAC to add regularly to your investments, you’ll maximize the time your money has to benefit from that effect. Even small amounts can make a huge difference over time.

If you started investing $100 a month at age 30 and earned an average of 5% a year, to be conservative, your savings would balloon to about $110,000 by the time you turn 65, despite only investing $42,000. 

Here is a handy calculator that will help you see how your pre-authorized contributions can grow over time.

Take control of your finances and budgeting.

A major benefit of a PAC is that you can’t spend what you don’t have. When you set up a PAC, you’re less likely to spend your savings frivolously, because the money is already allocated toward your RRSP, TFSA or other accounts. Moreover, the exercise of paying yourself first will slowly change some of your behaviours and attitudes toward money and makes saving less stressful. Plus, you can change the allocation of money in a PAC over time as your needs change, or as you are able to increase your savings rate.

Tax benefits

Scrambling to find money for an RRSP is no one’s idea of fun. Not only is there a risk you’ll miss the deadline – assuming you have the money to contribute – but it’s also not very efficient. By making regular RRSP contributions with a PAC, you’ll improve your chances of maximizing the contribution room in your RRSP, which could potentially help you nab a nice tax refund. The same approach can help ensure you’re capturing the tax benefits from your other registered accounts. Just remember, all registered accounts have strict contribution room limits. Keep that in mind when you set up your PAC. You could get dinged with monthly penalties on any excess contributions.

Lower your investment costs.

Dollar-cost averaging is another plus that PAC plans provide, and one that doesn’t get talked about enough. When you invest equal portions in a stock at regular intervals, you can lower your investment costs, regardless of which direction the market or a particular investment is going. Another benefit of dollar-cost averaging is that you can avoid making all of your investment when the price may be relatively high, or volatile.

A pre-authorized savings plan can take the stress out of savings and grow your money faster. Investing can be confusing sometimes, but the benefits of this approach are pretty easy to see.