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What You Are Missing by NOT Paying Yourself First

What does the term pay yourself first really mean? It commonly refers to payroll deductions to a group RRSP provided by your employer. How is that paying yourself first? Let me explain. When you are paid, your gross amount is taxed, also known as taxable income. So, the concept is this, lower your taxable income, pay less tax. The idea is to pay yourself some money before the Government grabs their little piece, hence the term “pay yourself first” is used.

If you make regular RRSP contributions to your employer's group policy, as an employee you can get tax advantages such as tax-deductible contributions, earnings that are tax-sheltered, and tax deferrals. Some organizations also offer employer matching to the RRSP. This means your employer will match the RRSP contributions you make, usually up to a certain percentage based on your tenure, into the company plan. This creates an additional incentive to pay yourself first.

Why should YOU pay yourself first? Let’s look at an example. If you receive a $50,000 salary, you would be paid $1923.08 per pay period ($50,000/26 pay periods) if you were paid bi-weekly. Without making any contributions to the company RRSP, you would pay $284.71 in income tax. But, if you contributed 5% of your salary, $96.15 in this example, you would only pay 253.64 in income tax. Because the RRSP contributions are deducted during payroll, you receive the instant tax advantage. You save $31.07 in income tax right now and $807.82 over the course of the year.

Based on this example, if you contributed 5%, your net pay would decrease by 65.08 but you would have put $96.15 away for your retirement. And, if your employer matches your contributions, you now have an even greater advantage to PAYING YOURSELF FIRST.

If you saved the $96.15 every pay period, by the end of the year you would have put away almost $2500 towards your future. The best part is it would only cost you $1692.08 ($65.08 x 26 pay periods) to save the $2500. Paying yourself first just makes sense.

This example was put together using the Payroll Deductions Online Calculator. Please look at scenarios using your income or salary to find the best advantage when contributing to your employer’s group RRSP. Here is the link: I also encourage you to speak with your financial advisor to help you meet your short and long term financial goals.

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Stagecoach Payroll Solutions – “Your Canadian Payroll Solution”


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