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A Bank of Montreal study reveals that 60 per cent of participating Canadians feel anxious about finding the money to contribute to their RRSPs as the 2012 deadline approaches. The primary reason for this anxiety is that almost half of the respondents are looking for ways to scrape together a lump sum contribution before the deadline.
Larry Moser, regional sales director of BMO in Ottawa says that anxiety about making lump sum RRSP contributions can be minimized by making regular payments throughout the year. This cornerstone of investment philosophy was popularized by David Chilton, the author of The Wealthy Barber.
Related: The Wealthy Barber’s key to success
It means that before you pay bills, or buy your groceries, before you do anything else, set aside a portion of your income to save. The first bill you pay each month should be to yourself. Decide on the amount and then set up automatic withdrawal.
On “Get rich slowly” Blogger J.D. Roth gives three great reasons why paying yourself first makes sense.
1. You are making savings a priority. You are telling yourself that your future is just as important as all of the current expenses you are responsible for.
2. You are developing sound habits. Most people spend money in the following order: bills, fun, savings. By putting savings first, you put the money aside before you find reasons to spend it.
3. You are building a cash buffer. Regular cash contributions are an excellent way to build a retirement nest egg. You can also allocate a portion of your savings for an emergency fund or to purchase a home. Paying yourself first gives you the freedom to choose.
You can even use the tax system to “Pay yourself first” and get a raise. If you are saving regularly in a registered retirement savings plan, you can complete a T1213 form and request permission for your employer to deduct a lower amount of taxes at source.
By reducing your withholdings at source, you are paying yourself and not the Canada Revenue Agency first, and increasing your net take home pay. You are effectively giving yourself a raise all year long, not just once at tax time.
It’s too late for 2012, but if you set up an automatic savings plan with your financial institution now, at this time next year you will have one less thing to worry about when you are nursing your post-holiday credit card hangover.
Sheryl Smolkin is a Toronto lawyer and writer. Contact her through her website and follow her on Twitter @SherylSmolkin.