Tuesday Tip of the Week: April 11, 2017
Automate and Coordinate Savings
Good morning and Happy Tuesday everyone. First things first, Grandma is back home so I am happy about that. Love you Vavo! Let’s get to the fun stuff now. Yesterday I discussed net worth and how important it was to be consistently growing your net worth. A simple solution is to save regularly and not accumulate debt. (Savings equals + net worth, Debt equals – net worth) I touched on automation a few weeks ago and in this post, I will describe more clearly about automating your savings.
I am a deep believer in emergency funds. I think everyone should have 6 months living expenses in the bank in case of an emergency. I am also a deep believer in the Tax-Free Savings Account. The TFSA is the best thing since sliced bread and I think EVERY Canadian should have one. Depending on your income level an RRSP is also a valuable savings tool. Well with so many things to save for, where do we start and with how much?
1) The Emergency Fund
Automate your chequing account to move over money into your savings every pay. If it costs you $2000 every month just to get by, then that savings account should have at least $12,000 in it. It’s simple and easy. If that number seems high it’s only because you have just started. Once you get rolling it’ll seem much more obtainable. It will seem quite low if you get sick or hurt and no money is coming in.
2) The Tax-Free Savings Account (TFSA)
The maximum contribution for the TFSA per year is $5,500. In my opinion, it should be every Canadians goal to max out their TFSA. Once you have built a healthy emergency fund then work on maxing out your TFSA. The $5,500 a year seems like a lot, but when you break it down into pay periods it is very doable. If you get paid bi-weekly you only have to put away $211 per pay to max out your TFSA. That may also seem like a lot but it is something you can work up to. Start with something small like $50 a pay and work your way up. In no time you will be saving the maximum. All it takes is dedication and determination.
3) The Registered Retirement Savings Plan (RRSP)
I start with the TFSA before the RRSP for one simple reason, tax. If you can put your money into a tax-free vehicle you should do so. Because the TFSA has such a small contribution limit then it becomes necessary to have another tax-advantaged vehicle to save your money. The RRSP is a great way to save for your retirement and gain a tax deduction. It too has a limit, 18% of your gross earnings. What you do then is multiply your income by 18% (ie: 50,000 x 18% = 9,000). You then divide that into your 26 pay periods as well. $346 per pay would be the maximum contribution for someone earning 50K.
These numbers may seem high for some people but that is only because they are not used to saving regularly. Once in the habit of saving every time you get paid it becomes easy. Automation will allow you to not worry at the end of the year about how much you have saved. You can then worry about planning your next trip down south. The first rule of thumb is to be a saver and not a spender.
Thanks for reading my Tuesday Tip of the week. Tune in tomorrow for WTF Wednesday, my weekly rant about things that take our money. Happy saving Friends!
“Try to save something while your salary is small; it’s impossible to save after you begin to earn more.” – Jack Benny
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Joseph James Francis is a Financial Advisor. You can find him on various social media platforms and at budgetboss.ca.