Whether it’s to create your emergency fund, plan a trip around the world, buy a car, or your very first home, there are many good reasons to save.
1. Make your budget
The first step before starting to save? Create a budget. Your budget will help you know how much money you can set aside each month. That’s right! Even if you have a good idea of ​​how much money comes into your bank account each month, it’s probably harder to tell how much you’re spending over the same period.
By creating your personal budget, which is an assessment of your income and expenses, you will be able to calculate the amount you can dedicate to savings each month. With this assessment in hand, you can make annual forecasts and set savings targets that respect your financial capacity. To optimize its effectiveness, the idea is to monitor it every month and adjust as needed.
2. Determine your savings capacity
Got your budget? Congratulations! You now have a very good idea of ​​what you can put aside once your monthly and annual expenses are paid. Next step: determine what percentage of that amount you can allocate to savings. Remember, no amount is too small. Is your savings capacity $25 a month? That’s already great. The key is to develop good habits that you can revisit if your means allow. It’s better to set a realistic amount that fits your budget, rather than setting yourself a savings goal that’s too high and you’ll end up abandoning it after a few months. As they say, saving is a marathon, not a sprint. And the earlier you start, the more your returns will compound.
3. Define your projects and objectives
Now that you know how much you can save, do you know why you’re saving? By defining your plans and goals, you’ll be better able to answer this question. Your first goal should be to build an emergency fund —a safety cushion you can draw on if needed. This is the same cushion that will allow you to cope with unforeseen situations, such as losing your job or your computer mid-term, without having to use your credit. This fund should cover three to six months of expenses. Done? Now you can tackle all your big projects.
4. Make a budget for your projects and a savings plan to achieve them
Once you’ve defined your goals, you’ll then need to set savings goals for each one—the amount you want to save and the time frame you’ll need to achieve it. A quick reminder: your timeline should be based on a realistic savings capacity that takes your budget into account.
Systematic savings
Worried about lacking the discipline to achieve your goals? Consider systematic savings. This involves setting up a system of automatic withdrawals from your checking account to a savings account. This way, you’re putting money aside without even realizing it. And since this amount is immediately deducted from your available capital, you get used to managing without it. Choose the frequency that works best for you, such as weekly, biweekly, or monthly. Receive an unexpected amount or bonus? Add it to your savings.
5. Choose the right account
TFSAs, RRSPs, TFSAs, savings accounts… It’s not easy to navigate. Each savings vehicle (or account) has its own characteristics and objectives. Consult an advisor to find out which one is best suited to your project. These specialists will be able to explain the differences, offer you the most appropriate options, and even suggest different types of investments in which to invest and make your money grow. In the meantime, here’s some basic information about these different savings vehicles. First, you should know that registered accounts have several advantages, particularly from a tax perspective, because they provide access to tax-sheltered deductions or returns. Among the most popular are Tax-Free Savings Accounts (TFSA): Unlike RRSPs, these do not offer tax deductions. However, the returns generated by your savings in a TFSA are not taxable. Useful for short- or medium-term projects, the TFSA allows you to withdraw your money at any time, with no limit on the amount. For shorter-term projects, be sure to choose less risky investments that can be withdrawn easily.
Registered Retirement Savings Plan (RRSP). It is tax-deductible, so any amount contributed to your RRSP reduces your taxable income, and therefore potentially your tax bill. Returns are also tax-free. However, amounts withdrawn before retirement are taxed. As its name suggests, this savings vehicle is intended to set aside money for retirement, with two exceptions. It can be used under the Home Buyers’ Plan (HBP) to finance the purchase of a first property or to finance a return to school under the Lifelong Learning Plan (LLP) . In either case, you must meet certain conditions to withdraw money. In addition, you must return the amounts withdrawn to your RRSPs over a specified period.
The Tax-Free Savings Account for First-Time Home Buyers (TFSP)Â is the best of both worlds. Like an RRSP, the amounts saved are tax-deductible, and like a TFSA, the returns are not taxable. However, it can only be used for a first-time home purchase; otherwise, the amounts you withdraw will be taxable. But unlike the HBP, you don’t have to repay the amounts withdrawn.
Should you save even if you have debt?
You may be wondering if you should pay off your debts before you start saving. Know that nothing is stopping you from doing both at the same time and not paying off all your debts at lightning speed! To do this, you must:
- Make a list of your debts
- Add up the amounts due
- Note the interest rates incurred
- Meet deadlines
- Prioritize your debts
In other words, you should prioritize the debts that cost you the most in interest, such as credit card balances. Also, consider due dates so you don’t miss a payment, or you’ll be charged interest, which could damage your credit report. Also, some debts already have payment schedules with pre-established mandatory periodic payments, such as student debt, for example. Once you have this list of priorities in hand, create a repayment plan and include the necessary amounts in your budget. Finally, assess the amounts you can allocate to your savings. The best way to stay on track with your savings? Set challenging goals. Saving may not provide immediate pleasure, but achieving the goal you set out to do so will give you great satisfaction.
