Are you thinking of planning for your retirement? One of the most effective retirement savings strategies is to pay yourself first.

This concept involves prioritizing your savings by automatically setting aside a portion of your income for retirement before addressing other expenses or spending money on non-necessities.

By consistently saving and investing over time, you can build a solid nest egg, leverage the power of compounding interest, and set yourself up for a very comfortable retirement.

What does ‘paying yourself first’ mean?

The term is often thrown around in the world of business and entrepreneurship. In an effort to constantly grow and expand, many small business owners re-invest every dollar they make into their business, often leaving their own savings dry.

This principle applies just as much to employees working toward retirement as it does to small business owners, though.

Last year, 49 per cent of Canadians weren’t able to save anything for their retirement, according to a by the Healthcare of Ontario Pension Plan (HOOPP).

To be fair, the rising cost of rent, groceries, and other living expenses has been disproportionate to rising income, leading six in 10 Canadians to question their ability to keep up with the cost of living, per .

I would argue, however, that this makes it more important than ever to pay yourself first.

Automating your savings

One of the easiest ways to ensure that you always have something to contribute to your savings is to automate your savings. This ensures that, no matter what, you’re always putting something towards your future -- even if it’s just a small percentage of your weekly paycheque.

Most banks, savings, and investment accounts have settings that allow you to set up recurring deposits on specific dates, so you can have the funds automatically withdrawn as soon as your paycheque arrives.

I like to think of automating savings as building a habit with as little friction as possible. It’s a lot like going to the gym. If your gym is a block away from you, you’ll be much more likely to maintain a regular workout schedule than if it was a 30-minute drive away. Similarly, if you have to do calculations and manual transfers every paycheque, you’ll be much less likely to save than if it were automatic.

Combine strategies

The number one way to get ahead is to start early. The earlier you can take advantage of the effects of compounding interest on your retirement savings, the more you’ll have saved by the time you retire.

Here are some other tips to help you maximize your retirement savings.

Maximize employer contributions

Many employers have retirement programs that offer to match a certain amount that each employee deposits into a Registered Retirement Savings Plan (RRSP). It is usually a good idea to contribute enough to maximize your employer’s contribution, as it’s essentially free money.

Maximize tax-free accounts

Tax Free Savings Accounts (TFSAs) are, by far, one of the best savings and investment vehicles available to Canadian residents. These accounts can be used to hold investments that yield compounding interest or pay dividends over time.

The best part of using a TFSA for your retirement savings is that you aren’t required to pay any capital gains, interest, or dividend tax on money earned within a TFSA.

You can combine the paying yourself first method with these strategies; for example, you can set up automatic payments into your employer's RRSP or your TFSA.

Downgrade your lifestyle

If you’re finding that you’re just keeping your head above water and staying on top of expenses, with little leftover to save or invest, you’re not paying yourself first -- you’re paying for your lifestyle first.

For many, the simplest strategy for starting to pay yourself first and investing in your retirement is to downgrade your lifestyle.

I’m not saying you must adopt an entirely Spartan existence devoid of creature comforts. However, some simple ways to reduce your cost of living while still maintaining a decent standard of living include:

  • Trading in your car for something with a lower payment or taking public transportation
  • Downgrading your apartment or house or get a roommate to split living costs
  • Prepping your lunch and dinner to save on eating out
  • Adopting a more minimalistic lifestyle and finding lower-cost forms of entertainment
  • Buying your clothes from discount retailers

I recommend keeping track of your spending so you can see the difference. Then, all you have to do is take the difference and commit to investing it in a retirement savings or investment account.

How much should you save?

The amount you need to sustain your quality of life in retirement depends on how you plan to retire.

Financial planners typically suggest that the cost of maintaining your current lifestyle will be around of your cost of living.

Canada’s Retirement Hub provides a handy to help you calculate how much you should be saving based on your current income and retirement goals.

Keep on reading for more savings tips to help you better plan for your retirement.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on .

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