How to start saving
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Jan 30, 2013  |  Vote 0    0

How to start saving

Ottawa East News
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Five years ago, I made a commitment to save at least 20 per cent of my net income per year in a registered retirement savings plan or a registered education savings plan for the kids. So far I haven’t met that goal. But the funny thing is I have started saving.

Before I made the commitment, I wasn’t saving anything. It seemed like every dollar that came in was allocated to something. Even if I managed to hold onto money for an extended period of time – like six weeks – we’d get an unexpected bill or I’d spot a deal on a flight to see my extended family. Without thinking about the future value of that money, I’d fork over my limited savings to cover the cost.

But one day, a relative who deals in financial matters pointed out to me that, while I was certainly not making a ton of money as a then part-time freelancer, I probably could be saving a little bit of money on a regular basis. He suggested I try depositing all my income into a savings account and then transferring just 80 per cent of the net income into my debit account each month.

Simply withholding 20 per cent of my income on a regular basis forced me to learn to live on less.

That’s because one of the keys to saving money is putting it aside before you have the chance to consider spending it, says Dilip Soman, a professor of marketing at the University of Toronto’s Rotman School of Management,. He conducted a series of studies in rural India, which found people who allocated money to savings were far more likely to save than those who intended to save, but didn’t take the time to portion the money out from their spending budgets.  And those who allocated the money toward a specific goal – like their children’s education – were more likely to save than those who were saving without a goal in mind or toward multiple goals.

People often view multiple goals as conflicting, Soman explained. If I put money into my retirement plan, am I taking money away from my children’s education fund? In reality, all savings are good, but with too many choices, potential savers are more likely to throw their hands in the air and give up on the idea of saving at all.

Another way to raise the stakes on saving is to implement a transaction fee for accessing the funds. In the India studies, participants were asked to put one to two per cent of their weekly income into an envelope to save for their children’s education. The transaction cost to accessing the funds was to rip the envelope open. Believe it or not, this in itself was enough to deter many people from touching the money. But for some participants, Soman and his colleagues up the stakes. On the envelope used for education savings, they printed a photo of the participant’s children. If the participant wanted to get into the envelope holding the education fund, he would have to rip right through a photo of his children. Over the study’s six-month period, not a single participant opened the envelopes with the photographs.

The equivalent in Canada may be to put the money directly into the RESP or RRSP or a tax free savings account. The money always belongs to you, which means it’s always accessible in an emergency, but you’ll be less likely to dip into it to pay for your Hockey Night in Canada party if you’re subject to a transaction fee.

If you’re still intimidated by saving, try this simple method to get started: Plan to save a little bit of money in a jar every week for 52 weeks, increasing it little-by-little. In week one save $1, in week two save $2, all the way to week 52 when you save $52. By the end of the year, you’ll have saved $1,378. (A recent article in Chatelaine recommended doing the savings challenge in reverse if you feel you have more discipline at the start of the year).

Of course, if you really want to commit yourself to saving, put the money in a jar that has to be smashed to bits when you’re ready to spend the funds.

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