Amid inflation and a high cost of living, 71% of Canadians are finding it challenging to save for retirement. According to a recent BDO Canada survey, 64% of respondents aren’t on track to save enough, of which half noted they’re very far behind on their saving goals.
Now that the holiday season is over, take the time to put saving money back on your radar. Focus on financial goals, such as a new car or home, building an emergency fund, or implementing a retirement plan in the new year.
Here are tips to take your savings strategy beyond a mere resolution and turn it into an actual game plan in 2023.
Choose a savings target
Pick a number, but not just any number. Choose an amount of money based on your goals and decide how much you’d like to save this year.
As a ballpark figure, we should all be saving about 10% of our take-home pay. For instance, if you bring in $5,000 a month after taxes, that is at least $500 in savings. And, when you get a bonus, inheritance, or extra money, sock away 10% of that, too.
The same goes for those who don’t have a regular income. Calculate your earnings at the end of each month and put at least 10% of that into your savings.
Small but consistent sums in your savings account can make a huge difference 10 or even just five years down the line, when you have a financial goal like putting a down payment on a new car or a house.
Invest in a TFSA or RRSP
Tax-free savings accounts (TFSAs) are tax-sheltered, registered accounts that let you save money in various high- and low-risk ways through a financial institution or investor service.
Build a TFSA portfolio with various products from savings accounts to stocks and bonds and even guaranteed investment certificates (GICs). In 2023, you can put aside as much as $6,500 in a TFSA. Your TFSA contribution room grows every year that you don’t contribute, and you can never lose it. So, if you can’t contribute the maximum amount, your contribution room will carry over. There’s no penalty for taking money out of a TFSA, making it a great tool for short-term savings, like a vacation fund or other savings strategy.
While there’s no penalty for withdrawing from your TFSA, you could be penalized if you replace that withdrawal in the same year and end up overcontributing. For instance, let’s say you contributed the maximum $6,000 to your TFSA last year but had to withdraw $3,000 for an emergency. Then, before the end of the year, you replaced that withdrawal and put $3,000 back into your TFSA. This would be considered an additional contribution, making your total contribution for the year $9,000, which is above the allotted limit. You would be taxed on this contribution.
Registered retirement savings plans (RRSPs) are typically what Canadians without pensions use to save money for retirement. The best thing about an RRSP is getting a tax break if you have one. You’ll pay tax on the money when you finally withdraw the funds, but usually, that’s at a much lower tax bracket than when you got your tax break. Plus, your money grows tax-free while it’s in the account. The money is not easily accessible, though, so it’s not that great if you need the money now or anytime soon, but with the right interest rate, it’s great for long-term investments.
As an eligible first-time homebuyer, you can take out up to $35,000 from your RRSP to use toward a down payment on your home, tax-free. Mature students can also use their RRSP funds to go back to school through the Lifelong Learning Plan (LLP).
Most financial institutions also offer high-interest savings accounts that are flexible with decent interest rates. In other words, you can take your money out of the account at any time, making these types of accounts great vehicles to save for vacations, renovations, or emergencies. Keep in mind, however, that you’ll be taxed on any interest you earn.
Compare mortgage and insurance rates
If you drive a vehicle, compare car insurance rates from multiple providers to make sure you are getting the lowest rate possible. Auto insurance rates across companies vary depending on a lot of factors, including your driving history, claims history, and market fluctuations. Moreover, there could’ve been changes over the past one year that warrants looking at the coverage you require.
For instance, you may have moved to the suburbs and don’t drive as often as you did, and this brings down your insurance rate. Comprehensive coverage is optional, and if your car is old and you’re paying a high deductible on your insurance, you can consider dropping this coverage. Bundling your auto and home insurance policies is another way to save money on your insurance.
And Canadians are painfully aware that mortgage rates are much higher than they were two years ago, thanks to seven hikes last year from the Bank of Canada. Make sure you compare mortgage rates from different providers to make sure you are getting the lowest interest rate on your loan.
Make saving a priority in 2023, one step at a time.
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