Can you use a line of credit as a “forced” savings plan?


Chris finds there isn’t a reliable amount of cash available for saving at the end of every pay cycle, and wonders if there’s a better way to reach his financial goals.

Can you use a line of credit as a “forced” savings plan?

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Q. I want to save for retirement, but “other important things” always seem to come up. After paying all the household bills including the mortgage, whatever I have left gets transferred into my “Retirement Fund.” The amount ranges anywhere from $200 or $1,500 every two weeks.

Now, here’s what I’m thinking: What if I made my line of credit automatically pay $1,500 into my Retirement Fund, forcing me to pay my line of credit, in full, every two weeks? For $3 a month in interest charges, I would have forced savings, instead of the “maybe savings” I have now. (Note, I’m not sure if there’s such a thing as automatic payment from a line of credit.)

Do you think this is a good system, or should I try to train myself to save, like I have been doing for decades to no avail?

A. Thanks for your question about saving strategies, Chris. Having a simple, defined strategy is often just the motivation we need to help us meet our savings goals.

What I’ve found useful is to start by confirming the goals of your savings and then give them each a meaningful name. For instance, “I’m saving for retirement” is not as motivating as saying “I’m saving for financial independence at age 55.” Then, set up a different no-fee online savings account for each goal, giving the accounts specific names and purposes, such as “Car Costs” (maintenance, insurance, license), “Travel” (perhaps “Best Trip Ever to Barbados”), and other specific accounts, each named for a key savings goal.

Set up automatic transfers from the account your pay is deposited to on payday to each of your key savings goal accounts. It looks like your monetary surplus available for saving fluctuates from month to month, so you may need to do manual transfers for some of the accounts. And while I appreciate the fact that you may need the structure of “forced” savings, I think you can accomplish it with specific goal accounts rather than a line of credit. This way, you have funds for not just retirement but for your “other important things” as well.

If your goals are important, then I think this system can work for you. Review regularly—every two to three months—to make sure you are moving forward to your projected savings. You may have to make adjustments along the way but you’ll get there before you know it.

Janet Gray is a fee-only, advice-only Certified Financial Planner (CFP) at Money Coaches Canada, based in Ottawa. She sells no financial products.

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