The case for living paycheck-to-paycheck

By David Fielding | August 8, 2017Empty Wallet

Guess What Studies show many Canadians are living paycheck-to-paycheck.
So What That’s not a bad thing—unless we’re ignoring our future needs.
Now what We should “pay ourselves first” by timing an automated transfer to a high-interest savings account with our payday.

Have you hugged your payroll accountant lately? If you’re a salaried employee, they’re one of the magic people you probably take for granted, along with the guy who delivers the water and the person who dusts around your collection of coffee cups each night.

There’s good reason to give those number crunchers some love: According to the Canadian Payroll Association almost half (48%) of Canadians surveyed said they would have trouble making ends meet if their paycheck were delayed by a single week. One in four (24%) didn’t think they could come up with $2,000 if pressed.

It’s no secret that a large number of Canadians are living paycheck-to-paycheck. You can’t swing a Google search without hitting a hand-wringing headline that says as much. But here’s something most people don’t know: Living paycheck-to-paycheck doesn’t have to be a bad thing. You can make it a powerful way to save. The secret to making ends meet while saving a little something for a rainy day is all about timing—and playing a timely trick on your brain.

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Both personal finance experts and psychologists agree: You should be paying yourself first. That means setting money aside for savings right off the top — before you can spend it — with an automated transfer timed to your payday. It’s as easy as moving some money into a separate high-interest savings account. The amount doesn’t so much matter — 5%, 10%, even $50 is something — just that you move fast.

The key is to get the money out of your account before you even see it. Because once you see it, you’re going to want to keep it. Behavioural psychologists refer to this as loss aversion: We don’t like giving up what we already have. In fact, they refer to the pain of paying when we part with our money. Yes, it’s real pain. In fMRI tests, scientists have been able to show that the same region of our brain that processes the pain of, say, a stubbed toe, also lights up when we hand over our hard-earned cash.

Scientists have identified a number of ways our brains are able to dull the pain of paying — not all of them are good. Credit cards do this by deferring the actual payment until another day. So do furniture stores with don’t-pay-a-cent events. The government does it by taking taxes and pension contributions in the form of payroll deductions. We don’t miss the money because we never really consider it ours in the first place. By timing an automated transfer to payday, we’re essentially creating forced savings in the form of our own payroll deduction.

But there’s another reason we don’t like paying ourselves first and it has to do with something psychologists call hyperbolic discounting. It’s our tendency to prefer a smaller-sooner reward over a larger-later reward. We know our future self could use the money, but we’ll gladly take the dollar today over two dollars down the road.

Business journalist Amanda Lang said she had a hard time paying herself first until she came to the realization that her future non-working self needs to share in her current working self’s income. “Saving isn’t cheating yourself, it’s sharing with yourself,” she told Evree. “I think we tend to forget that of the 85 to 90 years we may be alive, we really only have about 20 years of peak earnings.”

Some studies have shown that being forced to think about your future self can be a motivating factor in saving. In a 2011 study performed at New York University, participants who interacted with age-progressed images of themselves contributed more generously to a hypothetical retirement account. (They were even more generous when the senior selves were made to look sad.) But that’s a hard thing for many of us to replicate, while payroll deductions are easy. You just set them and forget them.

So go and set up your own payroll deduction. We promise it will feel painless. And your future self — even if you can’t see them — is totally grinning at your ingenuity.

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