S is for savings
Savings enable you to:
- achieve goals such as purchasing a car, traveling or buying a house
- invest money to earn interest
- contribute to an RRSP
Saving money can help you reach your small, medium or large goals like buying a computer, taking a trip or purchasing a home.
In order to save, your income must be higher than your expenses. It's helpful to use a budget to plan your savings.
4 ways to earn money
- Work for it
- Receive it as a gift
- Be given an allowance
- Earn interest or other investment income
Money earned can be:
- spent
- saved in your wallet or piggy bank
- deposited in a savings account
- invested
Facts about saving
- You can't save money if you spend it all.
- Money saved in your wallet or piggy bank is easy to spend and doesn't grow in value.
- The general recommendation is to save at least 10% of your income.
- The earlier you start saving, the more you'll save—even if you can only set a little aside.
- Money deposited in a savings account or invested earns interest, so it grows over time.
Simple interest: revenue calculated based on your initial deposit in a savings account or investment. In exchange for the deposit, your financial institution periodically gives you a percentage of the total.
Compound interest: revenue calculated based on the initial amount plus the accrued interest. It can be thought of as “interest on interest.” Your investment grows over time—slowly but surely.
Systematic savings: a plan by which you ask your financial institution to automatically and regularly withdraw a set amount from your account and deposit it in a savings account or investment.
Investing means setting money aside in order to make it grow.
The initial investment is called the capital base. It grows over time as interest, dividends and capital gains accumulate.
- Interest: the payback on an investment. Interest is calculated as a percentage of capital, according to the capital base invested and the term.
- Dividend: the share of revenue a company redistributes to members or shareholders in proportion to the number of shares they hold.
- Capital gain: the profit earned from selling property or investments.
Investment vehicles are financial products in which investors can invest to grow their money.
Financial advisors help people determine their investor profile (risk tolerance, current financial situation, etc.) so they can find investment products that best meet their needs.
When it comes to investing, time is money. It's better to invest early, even if you only have a little to spare.
Investment vehicle | Features | Risk level |
---|---|---|
Term deposits |
|
|
Market-linked guaranteed investment |
|
|
Bonds | An investor loans money to a government or company in exchange for interest |
|
Stocks |
|
|
Mutual funds | Capital from multiple investors is pooled and handed over to money managers for investment |
|
A registered retirement savings plan, better known as an RRSP, is a type of investment account. It's a financial tool you can use to plan for retirement or save for a goal.
You can contribute up to 18% of your previous year's income to your RRSP every year. Unused contribution room from previous years can be carried forward.
The amount you invest in an RRSP is deducted from your annual taxable income, so it entitles you to tax benefits. If you withdraw money from your RRSP, that amount is considered taxable income.
Benefits of RRSPs
- Your investment grows tax-free.
- The amount you invest is deducted from your taxable income. You don't pay any taxes on contributions unless you make a withdrawal.
- RRSPs can help you reach short-, medium- and long-term goals.
The earlier you start contributing to an RRSP, the longer your money has to accumulate tax-free. Your savings for retirement or a specific goal grows under increasingly favourable conditions.
Your RRSP contribution room starts building up with your first income tax return. There is no minimum age to contribute, but the maximum age is 71.
RRSPs for specific goals
Preparing for retirementRRSPs allow you to set money aside tax-free while you're working to be used as another source of income when you retire.
TravellingContributing to an RRSP allows you to build your savings gradually and save money on taxes. You can use your tax refund for a specific goal, like taking a trip.
Going back to schoolUnder the Lifelong Learning Plan (LLP), you can withdraw up to $20,000 tax-free from your RRSP to finance your education.
Taking time off or fulfilling a dreamA portion of your RRSP can be used to take time off or achieve a specific goal.
Becoming a first-time home buyerThe Home Buyers' Plan (HBP) allows you to use up to $25,000 ($20,000 before January 28, 2009) of an RRSP tax-free as a down payment on your first principal residence. The withdrawal is interest-free and must be paid back within 15 years.