There are so many forces competing for every dollar you earn: crazy housing costs, ridiculous student debt, and of course, Amazon’s one click, one-day delivery service. (Damn them.) Sure, you’re going to Automate Everything. But what else can you do to improve the likelihood that you’ll get what you want in life? Identify your savings “buckets”.
Create Savings “Buckets”
There are lots and lots of things you could be saving for. Your priorities will be unique to you and will depend on your life stage, goals, and passions. The best way to start is to name what you’re saving for, and set up a separate place for the money. Here are some of the buckets you might be interested in. (Spoiler alert: It is going to be tough to save as much as you want for all of them).
- Retirement: Start early and contribute every month, even if the amount is small. You could open up a TFSA or an RRSP – just make sure you invest the money so it can compound over time.
- Down-payment: Set up a separate TFSA or high interest savings account for this bucket. If you’re planning on buying in less than 5 years, keep the money in GICs or cash so you don’t risk a stock market decline.
- Home maintenance or improvement: If you buy a house, you are going to need a new roof at some point. Or you’ll want to update your condo’s bathroom or furniture. Automate your savings so you have the money set aside in a separate account, instead of going into debt when the bill comes in. The rule of thumb on maintenance is 1% of your home’s value. That’s $4,000 on a $400,000 house, or $330 per month.
- Education savings: If you have a child, you need to have a Registered Education Savings Plan. Your contribution will generate a 20% government grant, which will go a long way 18 years from now. Open up an RESP at your bank, or at a robo-advisor, then set up an automatic transfer for $200 per month to max out your grant, and invest the money in a low cost exchange traded fund.
- Vacations: One week at an all-inclusive in the sun is at least $1200, or $100 per month. Set up an automatic transfer to ensure you get your dose of vitamin D next January.
- Holiday spending: One of the biggest contributors to credit card debt is holiday spending – gifts, entertaining and travel. None of these expenses are a surprise so use automation to save for them throughout the year.
- Emergency fund: A car repair, root canal, or job loss can really set you back financially. Set aside some money every month to cover unexpected expenses.
Adjust Amounts Over Time
The amounts you put into each bucket will depend on your life stage, income level, family situation and priorities. And they will change over time. There are benchmarks out there for each one – they make sense for some people but are ridiculous for others. Look at how much money you have coming in and then make the tough choices on where to allocate it.
I promise you this: The drip, drip, drips going into those buckets will fill your savings up over time.