Pay yourself first, automatically
If investing depends on what's left at the end of the month, it depends on willpower. An automatic transfer on payday turns it into a default. You set it once and it runs.
$50 a week, at an assumed 6% a year:
Assumes a constant return and monthly compounding, before fees. Real markets rise and fall, and returns are never guaranteed. Try your own numbers in the growth calculator.
Dollar-cost averaging
Investing the same amount on a schedule is called dollar-cost averaging. When prices are high, your deposit buys fewer units. When prices are low, it buys more. You stop trying to guess the right moment, which almost nobody does well.
Before you invest: the foundation
- High-interest debt. A credit card charging around 20% is a guaranteed cost. Paying it down usually comes first.
- A cushion. Some cash you can reach quickly, so a surprise bill doesn't force you to sell investments at a bad time.
- Free money. If your employer matches RRSP or pension contributions, find out how to get the full match.
Weather and climate
What the market did today is weather. Your deposit habit, your accounts and your fees are climate. You can't control the first. You control all of the second.
Markets will fall while you're investing. It's easier to stay calm if you decided what you'd do before it happens.
Raise it when you get a raise
Each time your pay goes up, increase the automatic deposit by part of the raise. You still feel the raise, and your savings rate climbs without a new decision every month.
Do this before the next lesson
- Set up one automatic transfer for the day after payday. Any amount counts, even $25.
- Write one sentence and keep it somewhere you'll see it: "When the market drops 20%, I will ___."
- Put a reminder in your calendar for your next raise: "Increase the automatic deposit."
Markets drop 20% and your automatic deposit is due tomorrow. With dollar-cost averaging, what happens?
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Where this comes from
- Growth illustration: Planted North calculation ($50 a week, 6% a year, monthly compounding, constant returns, before fees)
- Financial Consumer Agency of Canada: Setting up an emergency fund