One of the core tenets of financial planning is to pay yourself first.  Automating your savings is a painless way to save for retirement and, in all likelihood, you’ll barely notice that you’re living on less.

Most experts suggest putting away 10 percent of your income for retirement, but that number might seem out of reach for many Canadians today.  The key to developing good savings habits, however, is that you need to start somewhere.

Related: How much do you need to save for retirement?

That’s why I suggest setting aside what you can afford, be it three or five percent of your income, and try to increase that amount every year.

Small changes lead to big improvements

Before we had kids I used to go to the gym at least three or four times a week to lift weights.  After our first child was born, I stopped going to the gym and never got back into the groove.

Now that I have a bit more free time, I started working out at home.  My strength was nowhere near what it was five years ago, but I knew I had to start somewhere.  I could barely do 10 push-ups, but I kept at it every day, eventually working up to three sets of 30.

Take the same approach with your retirement savings.  If the thought of saving 10 percent of your income seems like such a daunting task that it’s preventing you from getting started, tone it down and start with a smaller amount, increasing it over time.

Related: Why putting off retirement savings can cost you

Most retirement calculators assume that you save a fixed amount every year and that number doesn’t grow with inflation.

According to Talbot Stevens, author of The Smart Debt Coach, inflating a monthly savings plan by two or three percent a year might not sound like much, but it’s a truly painless way to make a meaningful increase in the size of your retirement fund.

John is 25 and earns $50,000 per year.  He decides he can afford to save $250 per month ($3,000 per year) toward retirement – that’s six percent of his income.

The conventional “pay-yourself-first” approach doesn’t assume any increase in that amount over time, and so after 40 years of saving $3,000 per year John will have $480,000 saved for retirement.  Not bad.

How much would John have if he simply increased his savings rate with inflation?  An annual increase of just two percent would mean an additional $145,000 at retirement – or $625,000.

“As this example shows, big improvements come from small changes applied consistently over time,” said Stevens.

Related: 8 retirement mistakes to avoid

Will John miss the additional $60 or so that gets funneled into his retirement savings every year?   Not likely.

Final thoughts

In his book, Stevens explains that one of the big challenges to saving for retirement is that if the task seems too difficult in any way – too much of a sacrifice, too complicated, or too much effort – many people throw up their hands and don’t even try.

I know that if my goal was to do 100 push-ups a day, I would have given up after the first day.  I had to start small and build my strength back up over time.

That’s why, while it’s important to start the habit of savings, it’s much easier to start small and increase slowly.

Related: Breaking your subconscious money habits

Do you try and increase your savings rate every year, matching it with your salary increase or otherwise?

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12 Comments

  1. My Own Advisor on July 13, 2014 at 3:33 pm

    “The key to developing good savings habits, however, is that you need to start somewhere.”

    Well said.

    I firmly believe the key to success is doing a few, simple, things, very very well. You can ramp up from there. Same goes for most things in life, changing your diet, exercise, better at a sport or success in the business world. Think big, start and act small.

    Mark

    • Echo on July 14, 2014 at 3:10 pm

      I’m facing this right now with my TFSA – I know I’ve got a boatload of contribution room to get through, but I don’t have any money and I feel like I need to put a big amount in there to get it going. What I should do is start putting $50 or $100 a month into the account and get that snowball rolling downhill

  2. Dan @ Our Big Fat Wallet on July 13, 2014 at 11:58 pm

    I think 10% is really arbitrary and can be adjusted for each person. Theres no sense in aiming for 10% if you can’t save 5%. Its always best to start out small and eventually build up into larger amounts. Ive tried to increase the savings amount that gets taken out of my account annually and I really don’t notice the difference each year

  3. Chantal @ LSM Insurance on July 14, 2014 at 5:18 am

    The key is really is to systematically set the habit in place.

    If you never see the money to be saved its hard to miss it.

  4. Stephen on July 14, 2014 at 7:03 am

    Great advice. Creating a positive habit is one of the most powerful and hard things we can do. Making it as painless as possible to get started just to get the habit off the ground makes a lot of sense.

    From there, you can continually strengthen and improve the habit until it makes a real difference.

  5. Roadmap2Retire on July 14, 2014 at 8:57 am

    Good points, Robb. Too many people dont get started just thinking about how much time they have lost and could have saved. Instead of feeling sad for oneself about the past, its always better to ask the question “what can I change and do different to change my future for the better.

    Best
    R2R

  6. L on July 14, 2014 at 11:11 am

    Excellent Advice!

    I started out saving $10/paycheque. That’s a pretty useless amount, honestly, but it got me started. Then pretty soon I was raising that up because it WAS a ridiculously small amount.

    …then it seemed easy enough to cut back on a couple expenses and add that money in. The amount per paycheque has grown over time, and increases at least a little bit every year. I find that because it is a gradual increase, I don’t tend to miss the money. 🙂

    • Echo on July 14, 2014 at 3:16 pm

      I think the hardest part is convincing yourself to set up the automatic plan. Topping it up, even $10 at a time, is much easier. And once you see the account growing you’ll be motivated to save even more.

  7. Talbot Stevens on July 14, 2014 at 1:01 pm

    Robb, Thanks for sharing what might be the most valuable five words in financial planning: “pay yourself first, and inflate.”
    One of the timeless truths about financial success is to put good habits on autopilot, so the benefits occur without any extra effort or time.

    Cheers, Talbot Stevens

    • Echo on July 14, 2014 at 3:20 pm

      Thanks for stopping by, Talbot! Your book is full of smart, practical ideas that we should all at least consider.

  8. Beth on July 15, 2014 at 5:54 am

    I’ve usually tied savings increases to salary increases, so some years there has been no increase while other years there has been a larger increase. I love the idea of accounting for inflation as well (no pun intended!) That will give me a new goal.

    One thing that helped me save for retirement was having a life-long habit of saving. From the time I had my first paper route, a percentage of my income went to my university savings. My first job had a pension plan, and even though I was underemployed I was used to seeing a portion of my earnings go towards retirement. I’m fortunate, because it’s easier to continue a good habit than it is to start one.

  9. Gerard on July 17, 2014 at 2:27 pm

    Another, more hardcore option is “pay yourself first, but don’t inflate” — that is, don’t inflate your lifestyle every time you get a raise. Even if only half of each raise goes toward savings, that builds up to a whole lot by later in your career.

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