For most people, saving money is a lot harder than spending it. Developing a savings goal, creating a budget and sticking to the budget can be difficult. Passive savings options can be a good alternative to not saving at all. But is it possible to save money and not feel like you are having to save? Yes and no. Yes, because passive saving strategies transfer the responsibility of saving your money from you to someone else. No, because in the end, you are ultimately the one needing to make the decision whether to save and not withdraw savings prematurely.
Here are four passive ways to save money:
Have the government withhold more money in taxes
Okay, I know what your thinking. Why would I want to give the government more money than they are already taking from me? That sounds like a terrible idea. Well, that depends on what your objective is and whether you find it easy to save money each pay check.
Withhold money from your paycheck
Having more money withheld from your paycheck means a larger refund come tax time. Direct the refund amount to be deposited in a Tax-Free Savings Account (TFSA) or Roth IRA to avoid getting taxed on these monies again in the future. There are two arguments (maybe more) for not wanting to have a refund at tax time. The first is that overpaying on your taxes is like giving the government an interest free loan for the year. You give them more money than they needed from you and they give it back to you at tax time without interest. If your objective is to save money and you find it hard to save, it is better to get a refund of $XXX.XX amount at 0% interest than to receive $0 refund at 0% interest if you haven’t saved all year. The second argument is that inflation will reduce the true value (purchasing power) of your refund. Your money will be worth less. Even if this is the case we are talking about a difference of 1%-2% in inflation over 1 year. Losing 2% of a refund is better than not having anything saved at the end of the year. From a mathematical perspective, it makes sense not to have a refund. However, from a behavioral perspective, if the objective is to save money and you find it difficult to save each paycheck, then have someone else do it for you.
Print out a W4 form (or TD1 in Canada) and fill out the amount of additional tax you would like withheld every paycheck. Give the form to your employer so the payroll department can update your paycheck moving forward. A huge caveat to making this work however is to have your direct deposit information set with the government to go to a long-term savings or investment account, preferably a tax-free account in a TFSA or Roth IRA.
An alternative to withholding taxes is not to claim all or any of your tax credits/allowances on your W4 form. This will allow you to claim them on your tax return and get a bigger refund (if your income is not too high and you qualify for the credits). Some examples of tax credits/allowances result from having a dependent, spouse, taking care of an elderly or disabled family member, attending school etc.
Increase 401k contributions
Increasing your Registered Retirement Saving Plan (RRSP) contributions (401k in the States) has similar benefits to the first option except one is dealing with savings before tax dollars and the other is dealing with after tax dollars. Some additional benefits to making contributions include:
- the contributions are deducted at source so you don’t have to worry about spending the money hitting your bank account and not having any left to save
- some employers may match your contributions which means more money towards your long-term savings goal
- all contributions are tax deferred until you retire and start withdrawing the money. That means more time and opportunity for your investments to grow
Ask your employer about their 401k or RRSP program, even if they don’t offer any matching, the advantage of having the money deducted at source before it hits your bank account means a higher chance of saving.
Enroll in your financial institution’s savings program
Many financial institution offer their clients the opportunity to save money as they spend. Keep the change programs, or programs like these round up every purchase you make with your debit card (checking account) to the nearest dollar. The difference is automatically transferred to your savings account. In 2014, the average number of debit purchases U.S residents made was 21.2/month.
Save More Money
Scotia Bank offers the Bank the Rest Savings program which rounds up each debit purchase to the nearest $1 or $5. This ‘either/or’ option can be limiting for those that feel that $1 is too low and $5 is too high per transaction. TD’s Simply Save program offers a slightly different approach to passively saving money. Instead of rounding up per transaction, you get to set a dollar a mount to be transferred to your savings account with each debit transaction made. This amount can be between $0.50 to $5 per transaction. It also allows users to decide what type of transactions to count, debit purchases, ATM withdrawals or both. Bank of America also has a similar program to Scotiabank.
Have government benefits redirected to a separate savings account
In Canada, the government offers tax payers two direct deposit options for their tax refund and benefits. Taxpayers can use different banking information for these monies to be deposited. For example, the Canadian Child Benefit (CCB) amount is a monthly benefit that is deposited into your account each month if you have a dependent under the age of 18. The direct deposit information you provide the government for these monthly benefits can be different from the direct deposit information you provide them for your tax refund.
Many people have their money from the government deposited to their checking account and fail to use much of it to save or for its intended purpose. A better option may be to have one government income stream directed to your checking account and the other directed to a saving or investment account. My husband and I plan to have our CCB monthly payments directed to our child’s 529/RESP. Although it won’t be enough to fund a post-secondary education, it is a start.