Jump In, Make a Budget & Start Saving
Here are six easy things anyone can do to get a handle on their money in 2020 and help them start saving to reach their personal financial goals.
1. Figure out how much comes in and how much goes out
This isn’t as hard as it sounds. Given that most of our purchases are made with a debit card or credit card and bills are paid by automatic direct deposit, you can use the monthly statements as a tracking sheet. Set aside 2 hours and just get it done.
You should have 4 categories:
INCOME: Total all the money coming in per month, including wages, child tax benefit and any other sources of expected income.
FIXED EXPENSES: Total up all the items that must get paid each month like utilities, wifi, cable, mobile, mortgage, childcare, property tax, home, auto and life insurance, transportation, etc. For variable bills like hydro, just use an average from the last 3-6 months.
VARIABLE EXPENSES: Total up all the items that you spend on each month, but that you have some control over such as groceries, LCBO, restaurants, entertainment, clothing, allowance for kids, extra curricular activities, etcetera. This should include cash you withdraw for spending on non-fixed expenses. You’ll need to calculate an average monthly total for each item.
SAVINGS: Total up all the money you are setting aside each month for short and long term goals such as an emergency fund, vacation, buying a home or car, education, retirement or other goals.
Next, calculate your budget. Subtract total monthly fixed expenses and savings from your total monthly income. Whatever is left over is for you to spend on variable expenses each month. It’s that simple. Note that if the variable expenses total you calculated earlier is higher than this amount, you’ll need to review your lists and make some decisions.
- Are there fixed expenses you’re willing to eliminate (like Netflix) or can you reduce fees by getting a new quote (home & auto insurance are good examples) or by changing a plan (cable, mobile or wifi)?
- Can you reduce variable expenses by shopping at a discount grocery store and sticking to your list? Can you reduce the amount of take-out, cafes and restaurants you spend on?
- You may also have to reduce your savings goals for the time being too, although fixed and variable expenses should be the first place you look.
2. Pay down debt
If you have credit card debt, stop using your credit card and come up with a plan to pay it off. Divide the amount you owe by how much you can afford to pay each month. It should be more than the minimum payment and as much as you can possibly afford. Add this monthly payment to your fixed expenses list until it is paid off. If you’re really in deep, consider using a credit counselling agency.
3. Decide how much you want to save
Saving for retirement should be a priority but depending on what stage of life you’re at, it may be hard to set much aside.
Prioritize your saving goals, set a timeline and then to break it down into monthly payments. This goes for retirement, buying a home, vehicle, travel, education, wedding, or anything else you might dream up.
If you have an RRSP matching program at work, there’s no question you should take full advantage, as you would be missing out on free money.
After that, it depends on your short and long term goals and what you can afford right now. Are you saving to buy a house or planning to go back to school? An RRSP might still be a good option as there are plans that allows you to withdraw money for these purposes.
Are you planning a vacation? If so, you should be actively saving for this. Decide on the amount you want to spend, divide by 12 and save that amount each month. Throwing it on your credit card or line of credit should not be how your funding it.
If you have kids, then an RESP should definitely be something you consider. More on that below.
This is where talking to an expert can help you figure out the most tax efficient way to achieve your goals.
4. Open accounts – HISA, TFSA, RRSP, RESP
When you’re in a position to save, here are the places you should consider saving your money:
High Interest Savings Account (HISA)
This is for money you’d like to access within 1 – 2 years. Note that you’ll pay tax on any interest you earn in this account (you’ll get a T5 slip in February), so for long term savings, a TFSA is a better option. Shop around for a HISA that pays a decent interest rate. It might not be at the bank you currently use, but with online banking, transferring money between banks is pretty easy, so having money in different banks shouldn’t deter you.
Tax Free Savings Account (TFSA)
This is for additional retirement savings or other long term (2+ years) goals. You can contribute after-tax money into this account, up to your maximum contribution room. Both your capital and all the investment income earned can be withdrawn tax free, at any time. This type of savings plan is definitely worth learning more about as it offers a whole slew of benefits, including playing a critical role in estate planning.
Registered Retirement Savings Plan (RRSP)
This is a tax-deferred savings plan and it is an excellent place (for most people) to save for retirement. It can also be used to save for a home or education as there are special programs in place to allow you to borrow money from this plan as long as you repay it. As mentioned above, if your employer has an RRSP matching program, you should be taking advantage of it.
The cool thing about saving in an RRSP is that the tax you paid on your contributions each year is returned to you when you file your taxes, with the understanding that you will pay the tax later, when you withdraw the money in retirement. The benefit to this is that in retirement, most people earn less than when they were working, which means they pay less tax on the same money. Plus, the tax rebate is a forced way to save money; and let’s be honest, most of us need to be forced! A clever person would take that tax return and either reinvest it in their RRSP or save it in their TFSA or RESP.
Registered Education Savings Plan (RESP)
This is an education savings plan for young adults to use for post secondary education, up to the age of 31. As an incentive to save, the federal government offers two grants – the Child Education Savings Grant (CESG) and Canada Learning Bond (CLB). Eligibility depends on total family income, but at a minimum, every child qualifies for $500 per year in grant money (up to a maximum of $7,200) when $2,500 is contributed annually on their behalf by the subscriber.
There are several rules around RESP contributions and grant money, which you should familiarize yourself with, but the bottom line is, if you have children who will likely attend any type of post secondary education, you should take advantage of the CESG grant. It offers a 20% return on your money, which you’d be hard pressed to find anywhere else.
5. Set up automatic transfers
The best way to make sure you’re saving money is to have it moved directly into your savings or investment account each month. If you’re plan is to transfer whatever is left over each month into a savings account, you’re fooling yourself. You won’t do it. Besides, contributing on a regular monthly basis means you’re leveraging the power of compound interest.
6. Assess & adjust
It’s important to make sure you’re budget is working for you. Have a quick look at what came in and what went out at the end of the month. Did you break even, have some money left over or borrow to cover your bills? Based on what you discover, go back and readjust things so that your budget plan is moving you closer to reaching your financial goals.
EDUCATION IS KEY
If this all seems overwhelming, you’re not alone. The best thing you can do to stop feeling overwhelmed and start feeling in control, is to educate yourself about personal finance. Read books, subscribe to financial newsletters or blogs, follow social media accounts offering personal finance tips (you could start with @csrwealthman) or listen to financial podcasts.
Still have questions? I’m just an email, DM (Instagram), PM (Facebook) or phone call away and I’m happy to help you, anytime.