Tips for Saving Money in Canada: Paying Yourself First
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Saving can be tricky. It’s easy to lose track of your finances while purchasing essentials, paying bills, and enjoying yourself – all factors that make sticking to your financial plan much more laborious.
There’s good news, however. Saving money doesn’t need to be complicated. Canadians are lucky enough to have access to some of the best savings accounts in the world, with each account providing Canadians with unique advantages if used properly.
Generally, there are four types of savings accounts in Canada. These savings accounts include:
- Guaranteed Investment Certificate (GIC)
- High-Interest Savings Account (HISA)
- Tax-Free Savings Account (TFSA)
- Registered-Retirement Savings Plan (RRSP)
Using the four aforementioned savings accounts together can help you save money much more effectively. Below are some savings tips to follow that can help make the often arduous process of saving much more manageable.
Create a (Realistic) Budget
Tracking all your expenses will help you create a clearer vision of how much money you spend, and, subsequently, how much you’ll be able to save. You’ll also learn how to live below your means.
Saving large portions of money at once is the typical knee-jerk reaction many people have when building a savings plan, but an over-ambitious saving will guarantee to make the process more complicated.
Once you’ve budgeted your monthly expenses, you can have an honest look at how much money you can put away each month. Putting less into a savings account is better than putting more and removing it. It will also help you with the next saving step.
Pay Yourself First
Paying Yourself First involves making regular savings contributions before spending a cent on anything else. This includes saving before paying your rent, mortgage, bills, or other expenses.
In the Oaken Financial web series a Saversodes, Heather unveils how the Pay Yourself First Technique helped her change her spending and saving habits and make saving a priority. She details how saving even the smallest amounts of money allowed her to grow her wealth over time.
Before you can pay yourself first, you’ll need to have an idea of how each savings account works and how you can use them to your full advantage.
Using Savings and Investing Accounts Properly
Using the right savings accounts is a critical step in meeting your savings goals. Since your savings will be sitting there for an extended period, it’s essential to make sure that your money is in the right account and earning as much interest as possible.
Guaranteed Investment Certificates (GIC), High-Interest Savings Accounts (HISA), Tax-Free Savings Accounts (TFSA), and Registered-Retirement Savings Plan can all help you achieve your savings goals. Each comes with its own benefits as noted below.
Guaranteed Investment Certificates (GICs)
Guaranteed Investment Certificates, commonly known as GICs, provide a guaranteed rate of return and are eligible for CDIC coverage up to applicable limits. The rate for the GIC is disclosed at the time of investment and remains locked-in for a fixed amount of time, typically between 1 to 5 years. The money is inaccessible until the investment reaches maturity. For example, funds invested in an Oaken Financial GIC, with a 3-year, fixed term, will be available when the GIC matures in 3 years together with the interest earned over that period.
- GICs are a great way to earn interest on the money you’ve already saved and can help you grow your wealth
- While you cannot make regular contributions to a GIC as you can with a savings account, the locked-in nature of a GIC usually provides for a higher rate of return
- It is easy to renew a maturing GIC
Higher-Interest Savings Accounts
A Higher-Interest Savings Account may be a good option as it provides the benefits and ease of access to your funds common to most savings accounts, while still providing a rate of return that typically exceeds the rate of inflation. Oaken Financial currently offers a savings account with an interest rate of 2.30%, which is far above Canada’s current inflation rate.
- Higher-interest savings accounts are an excellent account for regular contributions
- The interest in these accounts is higher than most accounts available.
- There are no contribution limits which allows you to contribute as much and as often as you wish
Tax-Free Savings Account (TFSA)
A Tax-Free Savings Account (TFSA) is a type of savings plan where investments earn tax-free interest. The account comes with a contribution limit that that has increased each year and is available to all Canadians over the age of 18.
- TFSAs allow unlimited withdrawals, making them an excellent investing tool for earning tax-free interest
- Any amount you withdraw can be added to your contribution limit the following year
Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plans is a government registered-savings plan designed specifically for retirement saving. It offers tax benefits that can help reduce the amount of tax that you pay each year
- RRSPs are one of the easiest ways to see your wealth increase over a very long period
- Since RRSPs are retirement savings, small, frequent contributions can see exponential grown in as little as a few years
- RRSP annual contribution limits are based on your yearly income
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