Pay Yourself First

Before you determine how much to set aside, you must first understand where your money is going and how much you spend. You should also have a clear understanding of your mandatory versus discretionary spending – or "needs" versus "wants".

• Discretionary Spending: Discretionary spending reflects your "wants." This type of spending tends to be lifestyle-driven or involves things that bring you some level of satisfaction. Discretionary spending can vary from month to month, and includes things such as coffee shop visits, home decor, new electronics, eating out, or TV streaming accounts.

• Mandatory Spending: Mandatory spending reflects your "needs." It usually involves items that are necessities or requirements. This includes everyday living expenses like rent, groceries, and utilities; financial commitments you've made, such as mortgages, credit card debt, and car loans; or things that you need to stay healthy, such as prescriptions and other medicines.

Identifying and understanding your mandatory versus discretionary spending can help you make more sound financial decisions. You may be spending more on the “wants” than you realize. By paying yourself first, you're putting your savings or investments into the "mandatory" category and treating your savings like any other bill that must be paid, no matter what, rather than a discretionary expense.

It's easier to commit to paying yourself first when you know the purpose of your savings. Are you building an emergency fund? Saving for a down payment on a house? Paying for a wedding? If you're trying to pay off some credit card debt, you might save differently than if you're trying to buy your first home. As such, it is important to evaluate what your ultimate goals are. By understanding your savings goals, you can better understand how much to save.

If you have high-interest debt, such as personal loans or credit card debt, focus on paying them off first, as the interest payments could impact your ability to save. Once you have eliminated your debt, the money going toward your debt payments can be reallocated to a savings or investment account.

Paying yourself first doesn't have to mean opening dozens of savings accounts. If you haven't done any saving yet, you can start small. For example, start by building an emergency savings account $10 at a time. As long as that $10 is going out first, you will begin to make progress before any other bills. If you're not sure where to start, the 50/30/20 rule is a great way to break out you're spending.

The 50-20-30 rule works by allocating your spending into three key categories:

• 50% to mandatory spending or needs, including fixed and variable expenses.

• 30% to discretionary spending or wants.

• 20% to financial goals, whether that’s contributions to your retirement account, investments or debt reduction.

While the 20% rule is a good general guide, it isn't a one-size-fits-all rule. Some people can save above that rate, while others can't.

If you find that the 50/30/20 method is challenging every month, adjust your spending or saving to find a balance that works for you. Finding a balance that works for you may take some trial and error. The pay yourself first strategy only works if you are living within your means.

The easiest way to commit to a regular, automatic savings plan is to set up pre-authorized transfers from your banking account to a designated savings account. A PAC (pre-authorized contribution plan) allows you to pay yourself first by automatically directing money from your chequing account to your savings or investment account.

Don't feel obligated to run all your goals out of the same account. Many accounts have a specialized purpose which makes them ideal for certain goals. For example, if you're saving for a short-term goal like a wedding, a Tax-Free Savings Account (TFSA) lets your investments grow tax-free, up to a fixed deposit limit, and can be accessed anytime. While a Registered Retirement Savings Plan (RRSP) account is great for retirement savings since your contributions are tax-deductible, and the interest or investment income on your savings will grow tax-free until withdrawal.