Monthly bills like car payments, rent, groceries, mortgages, and credit cards debt can leave very little left over for savings and investment. Even for Canadians with relatively high incomes, it can seem like there are always new expenses popping up that make planning and saving for the future nearly impossible. You might be thinking, “Staying afloat is hard enough. How am I supposed to save anything?”
Luckily, there are some steps you can take to get your finances in order and start saving for tomorrow today. Money-saving opportunities are everywhere. It’s just a matter of creating a plan of attack and sticking to it.
Experts say that you should try to save 25% of your net pay throughout your 20s, including RRSP savings and any other pension fund savings. You should have the equivalent of your annual salary saved up by age 30, three times your annual salary by 40, and five times your annual salary by 50. By that time, you’ll have a nice nest egg for retirement.
These experts make it sound so easy, don’t they? If you aren’t on track for these numbers yet, there’s no need to panic.
Regardless of your current financial circumstances, saving money isn’t as difficult as it may seem, if you follow these strategies.
Pay off debt
Before you can set aside any savings, you have to get rid of any outstanding debt, starting with high interest debt.
Credit cards – which charge interest rates of up to 20% – are the worst offenders here. In an ideal world, you should pay off your credit cards at the end of every month. If you can’t do that, every extra payment you can make will help.
If you’re really saddled with debt on multiple credit cards, a personal consolidation loan may be a smart option for you. This loan will allow you to put all your outstanding balances onto a single line of credit with a lower interest rate.
Once you’ve climbed out of the hole, it’s crucial that you don’t fall back in. If you don’t trust yourself with credit cards, you might want to break out the scissors.
Once you’ve cleared your credit cards, it’s time to take on any lower interest debts you may have, such as mortgages or car loans. Some financial experts argue for a riskier approach at this stage, saying that the potential payoffs from investment can outweigh the burdens of low interest debts. But that is playing a dangerous game of spending money you don’t really have. To stay on the safe side, it’s best to get rid of all outstanding debts before thinking about investment.
Reduce expenses
One of the most effective ways to save money is to cut costs from your monthly budget.
For most people, housing takes the biggest chunk of money every month. Whether it’s a mortgage or rent, it usually comes out to about 30% of the monthly budget.
Rent prices are not as fixed as you may think. If you finish a lease and are looking for a new place to live, it’s always worth the extra effort to try to negotiate with the new landlord. You should also consider living in a different neighbourhood. If you can get a much better deal on a place that only requires a slightly longer commute, that could be a wise option.
If you’re a homeowner, you can usually save money on utilities. Make sure to turn off all the light switches, try to be quicker with the showers, and turn off the heat if you plan on leaving for a while. Every little bit helps.
When you’re doing groceries, generic brands are just as good as name brands. There’s no sense in paying extra for flashy packaging. Grocery stores also constantly have different items on sale. Keep an eye out for any coupons or rewards programs. If you go grocery shopping more frequently and buy less every time, you can take better advantage of sales, while also being less likely to have to throw out old food that has gone bad.
Occasionally, feel free to treat yourself and go out for a night. But you can be smart about this too. Scout out places that have deals and specials. Consider eating before you go out. That way you can just have a simple snack and a couple drinks, enjoying all the social benefits of a night out on the town, without having to spend too much.
Another way to keep on top of your budgeting is to remember to declare all your income with the Canada Revenue Agency (CRA). By doing this, you avoid unnecessary expenses such as additional accountant fees in the event you are investigated. Whilst it may be tempting not to, large sums of money appearing in your bank account may raise a red flag. By processing your filings accurately, you reduce the risk of being audited. The CRA is a good source of information and you can direct your tax questions to them. However, you may also want to seek advice from a professional tax consultant, or your accountant on if they offer audit insurance to protect you against the additional fees.
Remember, every time you can cut out an expense, that’s more money saved up at the end of the month.
Create an emergency fund
Unfortunately, most Canadians do not have anywhere near enough saved for a rainy – or snowy – day. Approximately half of Canadians have no emergency savings and rely on their monthly paychecks to get by.
Extra expenses from things like job loss, health problems, or unexpected car or home repairs are bound to come sooner or later. An emergency fund will allow you to weather the storm without overly disrupting your overall financial security.
Start putting aside a little every month towards this fund. It can take a long time to set up a proper emergency fund. The federal government provides some advice on this, saying you should calculate your total expenses for three to six months, and try to have the equivalent of that amount stored away in your emergency fund.
By definition, an emergency fund needs to be easy to access. But remember the whole point of this money: emergencies. Don’t touch the money for any other reason.
Savings accounts
Once you’ve paid off your debt, have gotten your monthly budget under control, and set up an emergency fund, the real savings can begin.
Your Registered Retirement Savings Plan is a great place to start. Aside from the obvious nest egg for your retirement, RRSPs have many other financial benefits. When you contribute to your RRSP, you can deduct those contributions on your personal income taxes. The income from interest in your RRSP is only taxed when it’s withdrawn, allowing it to grow tax free until that time. Moreover, when you retire and start to draw from the RRSP, you will likely be in a lower tax bracket.
Another good savings option is to set up a Tax-Free Savings Account (TSFA). A TFSA has several benefits:
- Retirees don’t pay tax on the money they withdraw from their TFSA. If you have enough income from your TFSA, your RRSP can continue to grow, and you can defer paying the taxes on RRSP withdrawals.
- With an RRSP, being in a higher tax bracket increases the taxes you pay when you withdraw the funds. With a TFSA, if your tax rate is higher when you take out the money, you will ultimately have paid less in taxes.
- If you don’t make the maximum contribution in a given fiscal year, you can carry that amount forward and contribute that much extra in future years.
- TSFAs earnings are not taxed, which makes them a good place to shelter any additional income.
When considering whether an RRSP, a TFSA, or both will work best for you, you might want to enlist some professional advice.
Investments
Now it’s time to look at some ways you can really make your money work for you.
Mutual funds are a great introduction to stock trading. You’ll find a wide variety of different portfolios available to help you discover your preferred investment style. Another benefit of a mutual fund is that you don’t have to pay trading or commission fees to a broker.
If you want to move beyond mutual funds, you should consider investing in a field in which you have some personal knowledge and interest. Just be wary of not putting all your eggs in one basket. Diversifying your investment portfolio can help spread out your risk. Of course, you should also be careful not to spread yourself too thinly either.
If you’d rather play it safe, investment bonds can be a great option. Interest rates on bonds are low, so you won’t likely make much money, but the biggest benefit from bonds is that they are so low risk that they can mitigate any losses from elsewhere in your portfolio.
As a new investor, it’s best to start with small, automatic investments. Robo-advisors are a great, hands-off way to manage your investments. Robo-advisors focus on low cost, high reward investments, using algorithms to build your portfolio based on your risk tolerance.
It’s always wise to consult a professional before you start out on your investment journey. They can help you create a strategy that strikes just the right balance of risk and diversity to suit your short- and long-term goals.
Financial security is possible
Securing your financial future is a lifelong, continuous task. But it doesn’t need to be a daunting one. It’s best to break it up and tackle it one step at a time: paying off debt, cutting expenses, creating an emergency fund, contributing to savings accounts, and ultimately, investing wisely, you can be well on your way to earning financial security and peace of mind.