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What's a PAC, and why should you have one?

What's a PAC, and why should you have one?

Posted on: January 02, 2013
Author: Staff

Good savings habits make building your retirement nest egg a lot easier. Pre-Authorized Contributions—or PACs—can be a helpful tool in your savings strategy.

PAC Basics

A PAC is a recurring automatic withdrawal that transfers a pre-specified amount of money from your bank account and puts it in an investment or savings account, such as an RRSP or TFSA. You can schedule PACs in a variety of ways, such as weekly, bi-weekly, semi-monthly, or monthly, and you get to pick the amount of money that you want to move.

PAC Benefits

A PAC makes it easy to allocate money to your savings. There are no regular updates to make and no risk of forgetting to make the transfer. With some quick math, you can figure out exactly how much your PAC amount should be to maximize your savings.

For example, if you have $6,000 in RRSP contribution room this year and you want to max it out, you can set your PAC to 12 monthly contributions of $500, or even 24 semi-monthly contributions of $250. That way, you’ll max out your contribution without having to worry about it.

Dollar Cost Averaging

Dollar cost averaging is another benefit to having a regular savings schedule. If you are regularly investing into a mutual fund, a PAC can help you dollar cost average your mutual fund investment.

Let’s take a look at what this means and how it works:

Because mutual fund prices can fluctuate, by making a single purchase, you can invest at an inopportune time and buy when the price may be high. The opposite is true if you make a single purchase when prices are low. However, trying to time the market has proven to be a futile exercise since no one can accurately predict the future.

By making regular purchases of a set amount, you will likely invest when the price goes up as well as when the price goes down. You won’t have to worry about investing in the market at the wrong time, because your mutual fund purchases will average out. Historically, market prices have risen over time, so if you exercise this strategy over the long term, it is reasonable to expect steady growth in your investments over time.

PAC Tips

  • Schedule your PACs for the same day you get paid.

    That way, the money will be directed to your savings before you even notice it’s gone, accommodating your savings within your budget.

  • Increase your PAC whenever you get a raise, or at least once a year.

    This will help you build your retirement nest egg faster.

  • If you have both short- and long-term goals, save for both by setting up separate PACs.

    For example, you could split your savings into two transactions: one that goes to your RRSP and another that goes to your TFSA.

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