You came to Canada with a lot of plans. You know that you need to set money aside to achieve them, but you’d also like to take the time to enjoy the pleasures of life right now. Here are some tips to help you take advantage of the short term while planning for your medium- and long-term future.
Adopt good habits
It’s no secret that in order to have savings you need to put money aside. But how do you make sure that you will succeed at it?
The first step is to set realistic and measurable goals, based on how much you want to save and the time required to do so. The sooner you start saving for a goal, the easier it will be to set that money aside without having to give up too much.
Whether you’re buying a home, a new car or taking a vacation, make sure you have the means needed to achieve your goals. If you have more than one goal for the coming years, go see an advisor to help you manage your priorities and find a savings strategy that works for you.
It’s very important to make a budget to determine how much money is available and set it aside. To simplify this process and create good habits, remember to schedule an automatic transfer every week or month so that you’re putting money aside without having to think about it.
Then all you have to do is stick to your budget and stay focused on your goals! You’ll find more tips in the links at the end of the article.
Reap the rewards of saving money
Let’s say that you’re putting aside $50 weekly, which accumulates in a savings account or plan. In 12 months (52 weeks), you’ll have saved $2,600. If you keep doing this and don’t withdraw the money, you’ll have $26,000 in 10 years, not to mention compound interest.
What is compound interest?
When you save money on a regular basis, the annual compound interest rate is applied to your savings and helps you grow your money. You’ll end up with more money over time without having lifted a finger!
There are many investment tools and vehicles you can use to set money aside for yourself or your family. Have you heard about the Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP) and Registered Education Savings Plan (RESP)? These 3 savings options are very popular because they offer many advantages.
What is a TFSA used for?
A tax-free savings account is a great way to save and generate tax-free returns. You can also withdraw money at any time (depending on the terms of your investment), without it being added to your taxable income.
It’s perfect if you’re looking to save for:
- Medium-term projects such as vacations and renovations
- Unexpected events, such as car repairs or having to replace an appliance
- Additional retirement income over the longer term.
Key points about TFSAs:
- Withdrawals are not taxable
- There is an annual contribution limit ($6,000 for 2022), and any unused portion will accumulate
- Avoid making frequent withdrawals so your money keeps growing
- Your money grows until you need it and you have access to it at any time. Note that the annual contribution limit is available to tax residents of Canada. A transient foreign worker does not accumulate TFSA contribution room.
How does an RRSP work?
A Registered Retirement Savings Plan allows you to set aside a percentage of your income each year to reduce your taxable income. It’s a long-term savings tool and this is where you’ll be able to see the magic of compound interest. You can even contribute to your life partner’s RRSP if you want. However, RRSP contribution room is calculated based on certain types of income, such as a salary. You become eligible the year after you receive the income.
An RRSP mainly allows you to:
- Save for retirement over the long term
- Reduce your taxable income and potentially receive a tax refund or a reduction in the amount of income tax payable in the short term. Over the short term, reduce your taxable income and the tax payable and potentially receive a tax refund.
RRSPs can also be used to achieve important goals:
- Purchase a first home: the Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 that is tax-free (but must be repaid)
- Go back to school: the Lifelong Learning Plan (LLP) allows you to withdraw up to $20,000 that is tax-free (but must be repaid).
RRSP or TFSA: which should you choose?
As you’ve seen, there are advantages associated with each of these two savings options. But if you combine them, you could get the best of both worlds. Let’s take the example of a home purchase where it’s a good idea to invest in an RRSP for your down payment. However, by also contributing to your TFSA on a regular basis, you can use this money for renovations or repairs on your new property, a win-win situation!
In addition, if you don’t contribute the full amount allowed to an RRSP or TFSA in a given year, it’s carried forward to the next year.
RESP: save for your children
This savings plan is a popular choice for parents and grandparents to help pay for their children’s or grandchildren’s education. The RESP will thus be used to pay for a child’s post-secondary education, which costs more. Your savings will be supplemented by Canadian and Quebec government grants, which your child will receive when pursuing eligible studies. In addition, an RESP allows you to put money aside tax-free. You’ll find more information on RESPs through a link at the bottom of the page.
Desjardins is there to advise and support you in choosing a savings solution that’s right for you. We wish you success realizing your goals in Canada!