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Budget and savings: Here’s some advice to help you achieve your objectives

14 January 2021 by National Bank
Plan a budget for better savings

Whatever your goal may be, saving is often the first step to achieving it. You could be setting some money aside to pay for a vacation, a car, or a first home – or maybe to plan for your retirement. For some, saving money may seem difficult. Here are some tips and advice from an expert to help you adjust your budget to make your dreams a reality. 

“If you have trouble saving, rest assured that you can improve your situation by using the right tools and developing the right reflexes,” states Steve Mc Cready, financial planner at National Bank. 

Step 1: Make a budget

To find out how much you can save, you first need to account for your income and your expenses. Then, you’ll be able to determine which expenses you could potentially cut down on. The one way to figure out all these variables is by making a budget. It’s an essential tool and the first step towards better financial habits. 

Also, you can make a budget whether you’re a family, a couple, or an individual. You can include your partner’s or the whole family’s incomes and expenses to get more of an overall picture of your situation. 

Why are budgets important? With a budget, you can make projections for the coming year, which will establish a global vision of your financial situation and help you set your savings goals. Then, make some projections at the start of each month to make sure you’re still on track with your initial plan, and follow up at the end of the month to ensure everything looks good. You’ll have to keep track of all your expenses, but it’ll help you make the right financial moves in the future. 

Feel free to do some research on the Internet; you’ll find plenty of online tools to help you make your budget or save so you can reach your goals

Step 2: Determine your capacity to save

After you’ve made your budget, you can figure out your savings capacity, meaning the percentage of your income that isn’t used to pay off your required monthly and annual expenses that you can allocate to your savings. 

“Whether you’re saving $25 per week or per month, that’s already a good start. The number doesn’t matter. You can increase that number when you’re able to. The important thing is to start as early as possible, develop the right reflexes, and turn it into a habit.” 

When it comes to saving, there’s no specific percentage you should be aiming for. Some people recommending setting aside 10% of your income, while others argue for 20%. Rather, the important thing is to set a realistic amount in line with your budget and your goals. Even if you’re only saving maybe 20 bucks at a time, it’s a good start to motivate yourself to set aside a small pool of money…that will grow larger over time. The important thing is to save, and it’s never too late to start

Step 3: Define your objectives

Ideally, your very first short-term goal should be building an emergency fund. In fact, saving is also essential for building an emergency fund or financial cushion that amounts to three to six months’ worth of expenses. It will help you pay for your expenses even if you’re on disability, if you lose your job, etc. 

If you’ve managed to free up some money you can put towards your savings, we recommend defining your goals and the timeline for them. “You’ll always be more motivated to save if you have a specific goal. In the short term, meaning over a year or two, you could set some money aside for a trip or to redecorate your home. In the long term, you could save for a down payment or for your retirement.”

With a solid savings plan, you’ll see that it’s possible to save for both your short-term and long-term objectives at the same time. 

Step 4: Make a savings plan

After that, we recommend making a savings plan to reach your goals. “Your savings plan should address these two questions: how much do you want to save up, and how long are you giving yourself to hit that number? If you want to save $5,000 in two years, you’ll have to set aside about $209 every month.”

“Once you have the money you need for a car, for example, don’t stop saving. Maintain those good habits. You’ll have money saved up for your next car 8 to 10 years from now.”

Step 5: Choose the right account

It can sometimes be hard making heads or tails of TFSAs, RRSPs and savings accounts. That’s why the expert recommends meeting with an advisor. “They will explain the different types of investment vehicles to you and suggest the one that’s most appropriate for your goal.” For example, a high-interest savings account could be helpful for setting up a systematic savings plan or to build an emergency fund. If you want to grow your money tax-free and take advantage of other tax benefits, you could consider opening a government-registered account like an RRSP or a TFSA. 

 

Our advice for small budgets 

Prioritize your debts

If you have debt, should you pay it off first before saving? “In life, there’s good debt and bad debt. A mortgage is a good debt because the interest rates are low, and you get an asset in return: your property. On the other hand, credit cards with high interest rates are bad debt. Ideally, you should pay off your bad debt before saving.” 

Identify opportunities to save

That’s the goal of having a budget: summarizing your financial situation so you can figure out how much you can save. “After you’ve made your budget, you may actually realize that you’re living in deficit, meaning you spend more than you earn. If that’s the case, you could examine all your expenses and figure out where you could save. Maybe your coffee runs every morning are costing too much, or your cell phone bill is too high. In a situation like this, your goal is to balance out your income and your expenses. Once you’re out of that deficit position, you can then determine the maximum you can put towards your savings.”

Pay yourself first by using systematic savings

Make a habit of paying yourself first with each paycheck you earn. What does paying yourself first mean? “As soon as you have a cash inflow, allocate a certain percentage of the total to yourself and turn it into savings. Pay yourself the same way you have to pay for electricity, rent, your mortgage, or your phone bill,” Mc Cready adds. 

Systematic savings is a simple and easy way to set money aside. It’s the best way to save, even on a small budget. For example, you could schedule automatic transfers twice a month when you receive your paycheque. “The main benefit is peace of mind. Everything is programmed. If you do it all manually, you could forget for a week or a month.”

Over time, you’ll forget about the money that’s transferred out of your account. Little by little, you’ll learn to live without it since it’ll be transferred before you even have time to use it. It’s up to you to decide where to deposit it, whether in a savings account, a TFSA or an RRSP.

Meet with an advisor

No income or goal is too small. “Some people don’t make a lot of money but still manage to set aside a good amount. Often, it’s just a question of reflexes and habits.”

Finally, keep in mind that saving doesn’t mean depriving yourself. “I’ll admit that saving isn’t sexy. There’s no immediate gratification. But the day you reach your goal thanks to your savings rather than your credit card, you’ll feel a great deal of satisfaction. Saving means preparing for your future,” Mc Cready concludes. 

Questions? Meet with an advisor to get answers right away. 

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