“The secret of getting ahead is getting started. The secret of getting started is breaking your complex, overwhelming tasks into small, manageable tasks, and then starting on the first one.” - Mark Twain
When it comes to your investments, the same principal applies. Financial goals can be overwhelming at first, but when you break the goal down in to manageable tasks, it becomes much easier to achieve. A pre-authorized payment is a tool which can help you to do that.
Pre-authorized contributions or PACs are payments that you can set up to automatically draw from your bank account and deposit into your investment account at regular intervals (such as weekly, bi-weekly, monthly). In many cases you can also direct the money contributed to automatically purchase a security.
Key Benefits of PACs
- You can pay yourself first. Build the PAC into your budget and keep the money you might have spent otherwise. When you skim a little off the top of each pay cheque it’s much easier to adjust into your budget. Have the peace of mind in knowing that you’re doing what you can to reach your financial goals. You don’t need to go through the annual ritual of finding the money to contribute to each plan.
- You can benefit from dollar cost averaging. This is a big one. When you contribute a flat dollar amount, you end up buying more units when prices fall, and fewer when prices rise – on point with the “buy low, sell high” mantra. What ends up happening is your average cost per unit is lower than what the average price is, each time you buy. Let’s look at an example of a $240 bi-weekly PAC:
Fund Price Total Contribution Total Units
$8 $240 30
$12 $240 20
The average fund price over the period is $10. If the price moves back to the average price $10, your portfolio is now worth 50 x $10 = $500, when your total cost was $480, so you’ve already made $20, even though the fund is at its mid-point. The more volatile the prices, the more benefit there is to staggering contributions in the form of a PAC.
- You can maximize account benefits. Whether it’s a tax benefit or a government grant, with a PAC you can do the legwork upfront to determine how much you want to save in each type of account so that you maximize the benefit. For example, take advantage of tax breaks from contributions to Retirement Savings Plans (RSP) and, if you have children, ensure you maximize your annual grant benefit to Registered Education Savings Plans (RESP). Set up the savings plan and let the investments, including the tax savings, grow over time.
- You can forget about timing the market. Your investment decisions shouldn’t be based on recent news headlines or emotional decisions. PACs are a great way to ensure you’re doing what you can to reach your financial goals, without worrying about trying to find the right time to invest.
- You minimize trade cost. There is usually no trade cost when you use a PAC to buy a mutual fund. This means more money remains in your portfolio and grows over time.
A quick guideline to setting up a PAC
How much to save
- Define your goals and determine an appropriate annual contribution amount that will enable you to reach those goals.
- Set realistic savings expectations. Be sure your contributions make sense within your budget.
- As a general rule, invest 10 to 15 per cent of your income.
- Make sure your contributions will maximize any grants or tax incentives you want to take advantage of, like the Canada Education Savings Grant for RESPs. (A bi-weekly payment of $100 per child will ensure you hit that mark.)
- Most PACs can be set up weekly, bi-weekly, monthly, bi-monthly, quarterly, semi-annually and annually.
- The more frequently you contribute, the more it becomes a part of your routine and the more you can take advantage of dollar cost averaging.
- Some funds have a minimum of a $100 per auto purchase, so you may want to extend your frequency if your average dollar amount falls below $100.
- We find most people like to match their PAC frequency with their pay frequency.
What to invest in
- Typically PACs are set up to purchase a mutual fund. Most ETFs do not facilitate a PAC set up like mutual funds do. Check with your investment manager to see what investment funds are available for PAC set up that fits your investment strategy.
- Pick a fund which closely replicates the overall asset mix of your portfolio. For example, if you have a balanced investment portfolio, look to contribute your PAC to a balanced fund, so that your broader exposure does not change. If your portfolio is comprised of several mutual funds, PACs may be set up for each fund following the asset mix you need to maintain.
Get Started Today
In market conditions where price movements are volatile, using PACs is one of the most efficient ways to invest. PACs are simple to set up, they are cost effective, and give you the peace of mind that you’re doing regularly what you can to reach your goal. Remember, $350 saved every two weeks over 30 years can amount to almost $1 million, assuming the investment grows at 7% every year!
There is no better time than the present. Speak to your investment advisor today and take advantage of the small but effective way to save for your goals.
Invisor offers Canadian investors personalized investment management solutions at a fraction of the cost of traditional advisor models, without requiring any minimum investment amounts. Get started now to tell us a little about yourself and your goals, and we’ll find an investment solution just right for you.
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