It’s good to have a clear picture of how much money you’re spending compared to how much you’re earning. If you have high interest debt, it may help to make a plan to pay off the debt first before investing.
Budgeting
Making a budget is one of the best financial habits you can start, at any age. It will offer a clearer picture of how you manage your money and help you make the financial decisions that are right for you.
A budget can help you keep track of your income and expenses, stay on top of bills, and figure out how much you need to save to meet your financial goals.
Steps to create a budget
Add up your after-tax income. Make sure to include all sources, such as employment income, government benefits, freelance income, etc.
Add up your fixed monthly expenses. Add up your monthly costs that tend to stay the same, such as rent or mortgage, utilities, and loan payments.
Estimate your variable expenses. These may change from month to month, for things such as groceries, gas, or entertainment expenses. Some may be necessary, others you might be able to reduce.
Plan for some occasional expenses if you can, such as gifts, clothing, or unexpected expenses.
Plan to set aside some amount to your savings. Money leftover after paying your expenses can be put towards short-term goals like an emergency fund, or your long-term saving and investing goals.
Review your budget each month and adjust where needed.
Your budget can change as your situation changes.
Saving
Saving helps you reach short-term goals. These could be as modest as saving up for a new phone or concert tickets. Or it could be building an emergency fund to help you through an uncertain time in the future.
Usually, savings goals involve a specific amount of money that you know you need to save.
For example, if you want to have an emergency fund worth three months of living expenses, you’ll be able to calculate that based on your current monthly spending.
You can set aside money for savings each month or each week, depending on your cash flow. Try to make it an automatic habit by setting up direct transfers from one bank account to another.
Ways to save money include:
- Setting up a direct deposit on the same day as your paycheque
- Making a savings plan for your tax refund
- Using savings apps or ‘rounding up’ features in your online banking
- Collecting leftover bills and coins in a jar at the end of the week
It pays to make saving a habit. Even small amounts add up over time.
Keep your savings somewhere you can access quickly when you need it, but still in a secure place, such as a savings account. These accounts will help you grow your money through compound interest.
Savings and chequing accounts are generally where people put money that they plan to spend soon.
A savings account could be used to set money aside for emergencies or to save for a large purchase. A chequing account could be used for day-to-day spending or to pay bills. An investment account can be used for investment purposes.
If you are under the age of 18, you can open a savings or chequing account with the help of a parent or guardian. You will need to have 2 pieces of acceptable identification to open an account. To open an investment account, your parent or grandparent will have to open an in-trust account for you.
There are several different types of financial institutions that offer these types of accounts:
- Banks and trust companies
- Credit unions
- Investment firms
Registered plans
To help you save, the Government of Canada has created several savings and investing plans. Called “registered plans”, these are accounts that can hold cash or qualified investments.
These accounts can be used as investment accounts or savings accounts. They are not intended for day-to-day use like a chequing account.
RDSPs
A Registered Disability Savings Plan (RDSP) is a long-term savings plan to help people who are eligible for the Disability Tax Credit to save for the future. When you open a plan, you may also get grants and bonds from the Government and your investments grow tax free.
8 things to know about RDSPs
The beneficiary is the person with the disability who will receive the money in the future.
The plan holder is the person who opens and manages the RDSP. The beneficiary can also be the plan holder.
There is no annual limit on contributions but the lifetime contribution limit for a beneficiary is $200,000.
Contributions can be made to the plan until the beneficiary turns 59.
Contributions are not tax deductible, but your savings grow tax free. There is no tax on the investment earnings, as long as they stay in the plan.
Until age 59, the beneficiary may be eligible for government contributions to the RDSP under the Canada Disability Savings Grant, and Canada Disability Savings Bond.
RDSP savings can be held in a variety of investments, depending on where the plan is opened.
The beneficiary must start taking regular payments (disability assistance payments) from the plan by age 60.
RDSP Contributions and Withdrawals
Anyone can contribute to an RDSP until the end of the year in which the beneficiary turns 59, or when the $200,000 contribution limit has been reached.
In general, if you withdraw money from your RDSP, you must repay some or all of the grants and bonds that have been in the plan for less than 10 years.
Regular payments must start by age 60.
Payments must be made at least annually.
Payments are taxable to the extent they exceed contributions.
RESPs
A Registered Education Savings Plan (RESP) is a dedicated savings plan to help you save for your child’s education after high school.
If you have an RESP for a child, the Government of Canada will provide additional saving incentives by offering education grants up to a certain limit to help you save for your child’s education. The amount you receive depends on your annual contributions and household income.
3 types of RESPs:
An individual plan is intended to pay for the education of one beneficiary. Anyone can open an individual plan and anyone can contribute to it. You can even open a plan for yourself. You usually don’t need to make a minimum deposit. If the beneficiary doesn’t continue with their education after high school, you may be able to name another beneficiary.
Contributions
You decide when and how much money to put in, up to the lifetime contribution limit of $50,000 for a beneficiary.
A family plan can have more than one beneficiary. But each beneficiary must be related to the person who opens the plan (for example, your children, grandchildren, brothers and sisters), and are under 21 when you name them.
Contributions
You usually don’t have to make a minimum deposit when you open the plan and you decide when and how much money to put in, up to the lifetime limit of $50,000 for each beneficiary.
Group plans work differently from individual and family plans, and each plan has its own rules. They also tend to have higher fees and more restrictive rules. The child doesn’t have to be related to you and you must make a minimum deposit when you open the plan.
Contributions
- You put money into the RESP according to a set schedule, up to the lifetime contribution limit of $50,000 for a beneficiary.
- The money you put in is pooled together with contributions of other investors.
- All of the investment decisions are made for you.
You have 60 days after signing your contract to cancel plans provided by scholarship plan dealers without any penalty.
RRIFs
A Registered Retirement Income Fund (RRIF) is an account that holds your registered retirement savings and provides you with income after you retire.
You can open a RRIF by transferring savings from a retirement account such as an RRSP.
6 things to know about RRIFs
You can open a RRIF anytime, but no later than the end of the year you turn 71.
You open a RRIF by transferring money from your RRSP. Transfers from other registered plans like pension plans and DPSPs are allowed under certain circumstances.
Once the RRIF is set up, you can’t make any more contributions to the plan. However, you can have more than one RRIF.
You choose the types of investments to hold in a RRIF. Examples: GICs, mutual funds, ETFs, segregated funds, stocks and bonds.
You must take out a minimum amount from your RRIF each year. This amount increases as you get older. There is no maximum withdrawal limit.
If any money is left in your RRIF when you die, it will go to your named beneficiaries or to your estate.
RRIF withdrawal
You have to start withdrawing money from your RRIF in the year after you open it. The federal government sets the minimum amount you must take out of your RRIF every year and it’s based on a percentage of the value of your RRIF.
RRIF fees
There is no set-up fee for most RRIFs, but you may pay other fees once you open a plan. These fees may include an annual administrative or trustee fee, investment fees and fees for making changes to your RRIF.
RRSPs
A Registered Retirement Savings Plan (RRSP) is an account that is registered with the federal government, and is intended to help you save money for retirement. RRSP contributions are tax-deferred. This means you don’t pay tax on your income used for contributions but you do pay tax on your withdrawals.
Before you open an RRSP, you must have worked in Canada and filed a tax return. The amount you can contribute to an RRSP is based on your earned income, up to certain limits.
5 reasons to open an RRSP
Contributions are tax deductible. You claim your RRSP contribution as a deduction on your tax return. For example, if you’re in the top tax bracket in Ontario, every $1,000 you contribute reduces the tax you pay by approximately $535.
Savings grow tax free. You won’t pay any tax on investment earnings as long as they stay in your RRSP. This tax-free compounding allows your savings to grow faster.
You can convert your RRSP to get regular payments when you retire. You can transfer your RRSP savings tax free into a RRIF or an annuity when you retire. You’ll pay tax on the regular payments you receive each year — but if you’re in a lower tax bracket in retirement, you’ll pay less tax. The required conversion date is the date you turn 71.
A spousal RRSP can reduce your combined tax burden. If you earn more money than your spouse, you can help build their tax-free savings by contributing to a spousal RRSP. Retirement income will then be split more equally between the 2 of you — which may reduce the total amount of tax you pay.
You can borrow from your RRSP to buy your first home or pay for your education. You can take up to $35,000 for a down payment for your first home or up to $20,000 to pay education costs for you or your spouse. You won’t pay any taxes on these withdrawals as long as you pay the money back within the specified time periods.
Use this RRSP savings calculator to figure out how much your RRSP will be worth at retirement.
RRSP Savings calculatorComparing TFSA and RRSP
TFSAs and RRSPs both offer tax advantages to help you reach your savings goals. Both of them can be used to save for retirement. But if you have to choose one over the other, make sure you understand how they are different. And then make your choice based on your own individual financial and tax situation.
- An RRSP is intended for retirement savings. A TFSA is intended to be for any type of savings goal.
- RRSP contributions are tax deductible. TFSA contributions are not. With an RRSP, you deduct your contribution from the income you report on your tax return. With a TFSA, you can’t deduct your contribution on your tax return.
- You pay tax on your RRSP withdrawals because you made the contributions with pre-tax dollars. TFSA withdrawals are tax free because you made the contributions with after-tax dollars.
- In the year you turn 71, you can’t make any more contributions to your RRSP and you must close it. At that time, you have to use your savings to buy either an RRIF or an annuity. With a TFSA, you don’t have to stop contributing or close it at a certain age.
- You need earned income to contribute to an RRSP but not to a TFSA.
- With both plans, you can name your spouse as a beneficiary. The money will roll over to them upon your death. But with an RRSP, after your spouse dies, taxes will be due on any money left in the account. So if your children inherit the money, they will receive what is left after the tax is paid. With a TFSA, only the increase in the value of the TFSA since the date of death is taxed in the year the children receive it. If the amount they receive is not greater than the value of the TFSA at death, no tax is paid.
TFSAs
A Tax-Free Savings Account (TFSA) is a savings account registered with the federal government that lets you save tax-free for any goal you want.
8 things to know about TFSAs
You can open a TFSA if you are 18 years and older and have a valid social insurance number.
You can put money in at any time, up to set limits.
You can save tax free for any goal you want (car, home, vacation).
You don’t need earned income to contribute.
You can take money out when you want, for any reason, without paying any tax.
If you take money out, you can re-contribute it the following year, in addition to the annual maximum.
You can hold a wide range of investments in a TFSA, like cash, GICs, bonds, stocks and mutual funds.
You can put money into your spouse’s or common-law partner’s account.
FHSAs
A First Home Savings Account is a type of registered savings plan for Canadians saving to buy their first home.
5 things to know about FHSAs
You can open a FHSA if you are a Canadian resident 18 years or older.
You can save up to $40,000 in an FHSA. You can contribute up to $8,000 per year.
Your contributions are tax deductible.
Once you open the FHSA, you can use it for up to 15 years. After that time, it must be closed.
If you don’t buy a home, any unused savings in your FHSA may be transferred to an RRSP. It can also be withdrawn as taxable income.
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