No Good Reason to Save & Invest? Do It Anyway!

Roughly 11 months ago, someone asked me to share my best tip for success with money. It took me less than a minute to say “automatic transfers”. Honestly, I really think that automating your finances is the cornerstone of mastering your personal finances.

Automation is beautiful because it removes the decision from your hands. More importantly, an automatic transfer removes the temptation to spend the money. If you’re paid bi-weekly like I am, you don’t have to waste time every fortnight asking yourself if you should set aside money, how much money should be set aside, whether to send that money to your emergency fund, etc… Each of those questions is an opportunity for you to spend instead of save, or to save less than you should, or to neglect one of the most important tools in your personal finance arsenal.

The automatic transfer saves you from yourself. Once it’s in place, you don’t have to think about it again.

I spend a lot of time here telling you to pursue your dreams and to determine your priorities so you can make those dreams come true.

Some of you might not know what your dreams are just yet, or you’re still trying to figure out your priorities. That’s fine. As a matter of fact, that’s more than fine. It’s completely normal. Life changes, so your priorities will change too.

Those changes don’t really matter when it comes to whether or not to automate your money. See, when you do figure out what you want from your life, you’re going to be very happy that there’s already some money set aside somewhere. Set up your automatic transfer today and just let the money accumulate while you’re figuring out what you want.

If you can, start with 20% of your take-home pay. That’s a decent chunk. If it’s just being wasted on frivolities and feckidoos, then it’ll serve you better in an emergency account, a sinking fund, an investment account, or a retirement account. I would suggest dividing your chosen amount into thirds:

• one third to your emergency fund until you have 6 months of income set aside;
• one third to your retirement account until you’ve maxed out your TFSA and your RRSP; and
• one third to short-term goals like a course you want to take, or some travel, or a hobby that you love.

Portion #1 – Your Emergency Fund

It’s going to take a minute or two to build up your emergency fund. That’s okay. Just start! When the emergency comes, whatever amount you have will help. Trust me when I say that no one in the history of the world has ever regretted having money set aside during an emergency.

Remember what the emergency fund is for. It’s money meant for your survival. If you lose your job, then the emergency fund has to pay for your shelter, your food, your medications, and your other necessities until you get another source of income. If you have debt, your emergency fund should also be able to cover those payments. After all, one does not need to have a vehicle repossessed nor dings to one’s credit rating while one is hunting for a job. (Some jobs care about your credit rating.)

It should be obvious but I’ll say it anyway. The fewer things that your emergency fund has to cover, the smaller it can be. Get out of debt and you won’t have to worry about how your creditors will be paid should you become temporarily parted from an income.

When money goes into your emergency fund, leave it alone. This is the money that is meant to replace your income should you lose your job. It’s not meant to pay for anything else.

While this blog is targeted at single people, I know that there’s more than a slim chance some of you will find partners and enter relationships. Relationships are another reason why everyone should have a big, juicy emergency fund. Not every relationship is meant to last. By having your own emergency fund, money will never be the reason that you stay in a relationship that is no longer good for you. Having your own money is insurance against financial abuse.

Portion #2 – The Care & Feeding of Future You

Next, you’re going to get old unless you die first. That means, there will come a point when you can’t work anymore. Before that day comes, you’ll probably reach a point where you won’t want to work anymore. You will want to have a nice, ginormous pile of retirement cash waiting for you. And if you can’t have a ginormous pile, then I’m pretty certain you’ll settle for a comfortable pile. Whatever amount you wind up with is up to you. If you save and invest $0 towards retirement, then that’s how much you’ll have at the end of your working life.

Start today. Fill your TFSA first, then your RRSP. Once those are filled, start investing in a non-registered investment account. As with your emergency fund, it’s going to take some time to maximize your contribution room unless you come into a lottery win, an insurance payout, an inheritance, or some other kind of windfall that you don’t spend on something else.

Always remember that the money in your TFSA, your RRSP, and your investment accounts must be invested for long-term growth. Yes – they’re called a Tax Free Savings Plan and a Registered Retirement Savings Plan. I get it, but I don’t care what they’re called. These accounts protect your money from being taxed, so go for growth. Invest in broadly-diversified, equity-based exchange traded funds so your money can grow exponentially through the magic of compounding.

Mutual funds are more expensive than exchange-traded funds, so try to invest in ETFs. Once you buy your ETF, don’t fiddle with it. Equity-based investments are meant to be held for a long period of time. If you think you’ll need money in the next 3 years, then set up a sinking fund to pay for whatever-it-is-you-plan-to-buy.

Portion #3 – Enjoying the Journey

Finally, you’re going to use sinking funds to pay for the things that bring you joy along your journey. Whatever extracurricular activity floats your boat probably comes with a price tag. Have a sinking fund so that you can indulge yourself. I worked with a woman who was very frugal in most areas of her life. However, she and her partner loved concerts. You better believe they had a sinking fund to pay for front row seats of their favourite performers. A young family member of mine discovered a love of travel. He just got back from his first cruise and is already saving up for his second trip to Japan. Another friend of mine attends writing retreats – money is needed for accommodation, travel, food, supplies, instructors’ fees, etc…

Life goes by very, very fast. And we spend so much of it at work, doing stuff for someone else that we probably don’t care about very much. The reality is that our society is designed to keep up endlessly stimulated. There’s very little encouragement to sit quietly and to contemplate what it is that you want, to plan for that, to save money towards making it a reality. Instead, we’re fed an endless stream of advertisements which exhort us to spend and spend and spend some more on the doodads and feckidoos that don’t exactly bring us long-lasting joy.

Part of every paycheque you earn should be spent on those things that make you happiest. Even if you don’t know what that is just yet, start saving for it. One day, you’re going to figure out what speaks to your soul and you’ll be so very happy that you have the money in place to acquire it. Maybe you want to take a culinary tour in Italy? Perhaps you like to make pottery? Maybe your sports club competes internationally and you need the funds to travel?

Whatever it is that satisfies your soul, make sure that you’re setting some money aside to do some of the things that make your life what you want it to be.

So that’s it. Even if you think that you have no reason to save and invest right now, I want you to know that you’re wrong. The fact is that you simply haven’t figure out the reason. You might not know what your priorities are, but you will one day. The fact that you haven’t fully fleshed out your dreams shouldn’t mean that you delay accumulating the money needed to make them come true. Set up your automatic transfer today then work on getting everything else sorted out.

Future You will thank you.