How to Put Your Saving and Investing on Autopilot
When a pilot puts an airplane on autopilot, they create a plan for the flight and provide the system with a specific goal. The plane is not flying itself, but instead following set instructions so the pilot can focus on other parts of the flight plan.
Did you know that this same principle can also apply to your savings? You can put your savings on autopilot! Pre-authorized automatic deposits from your bank account into an investment account allow you to create a set-it-and-forget-it strategy for your finances. Much like a pilot, this means you can move toward your longer-term goals with minimal day-to-day effort – allowing you to focus your time and energy on other things.
What is a PAC?
A pre-authorized contribution plan, also knows as a PAC, is a regularly scheduled, automatic contribution to an account of your choice (often your Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), Registered Education Savings Plan (RESP), First Home Savings Account (FHSA) and/or another investment account). The contribution typically comes from your chequing or savings account and, once set up, the funds are transferred on schedule without any additional work by you.
Here are three key benefits of using a PAC for your savings.
1. Automate and free up your time
When you set up a PAC, you can choose how much and how often you want to contribute, subject to any minimum requirements for the investment you select. You can also pause or restart a PAC anytime, as needed, eliminating any concern about getting “locked in." One of the key benefits of setting up a PAC is that it reduces some of the stress and effort associated with building savings habits. Let's be honest, transferring money to savings when a paycheque arrives can easily get lost in the shuffle of daily life. Think of a PAC like your personal assistant who helps keep you on top of savings goals.
2. Get where you want to go – faster
One of the most compelling advantages of PACs is how they can help you reach your savings goals faster. Building your savings through regular contributions means you could earn money (interest, dividends, investment growth) on your initial investment AND on the money you've made on your earnings – all thanks to the power of compounding.
3. Reduce your investment risk
Dollar-cost averaging (DCA) is a simple investing strategy that can help you reduce the risk that comes with trying to time the ups and downs of the market. DCA involves investing a fixed dollar amount, say $25, $50 or $500, on a regular basis (think bi-weekly, monthly or quarterly), regardless of market conditions. Automating the timing of your investments helps take the emotion out of decisions.
Financial professionals often suggest that people spend their money in this order: bills, fun, saving. Setting up a PAC can help you prioritize savings while keeping aside some discretionary funds for fun.
PACs at work
Want to see a PAC in action? Punch a few hypothetical numbers into this calculator to see how saving regularly can help you reach your goals. You can calculate different scenarios to get a view of how regular contributions can grow over time.
You’ve probably heard the expression "pay yourself first." It's a golden rule of savings for one important 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?
Find out more about PACs at RBC here. For more from our partners at Inspired Investor, visit rbc.com/inspiredinvestor.
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.
