Between RRSPs, TFSAs, savings accounts and pension funds, it can sometimes be hard to make heads or tails of it all. Not to mention savings! How much money should you be setting aside exactly? And where should you invest it? Rather than figuring out what’s in other people’s bank accounts, check out these three (real) profiles of millennials who save, with figures to support these examples, as well as some advice from an expert to help you achieve all your goals.
Job: Graphic designer
Daphne has bounced between freelance work and full-time jobs ever since she entered the job market five years ago. This year, she decided to commit fully to self-employment. Since freelancers don’t get any tax deducted from their income directly, they have to think about setting aside enough money to pay to the government every quarter or every year. Being a freelancer also means being your own accountant sometimes.
“I deposit about $75 into my TFSA every month, and I try to set aside 10% of my total income for a down payment,” Daphne explains, also stating that she wants to make a budget for the next fiscal year. For someone without any guaranteed income such as herself, a TFSA is a good savings option because it allows her to generate income tax-free.
Daphne is fortunate to have some financial support from her family. “When I was born, my grandfather opened a savings account for me at a bank. Now, I have a financial advisor who helps me figure out where to invest my money. That’s important to me because I’d like to buy a place in Montreal at some point,” she reveals.
“The first thing to do when you want to save is to make a budget and build an emergency fund,” states Ravy Pung, financial planner at National Bank. That’s a great financial move when you’re young. That way, you’ll be aware of how much you spend every month, and maybe even free up some money to set aside.
A TFSA is a good option for building an emergency fund; it should amount to three to six months’ worth of your monthly expenses. You should be able to easily access and withdraw the money if you stop working. You could also consider a high-interest savings account, which gives you more flexibility and fast access to your money. However, they don’t offer the tax benefits that come with TFSAs. So, choose carefully.
If your goal is to buy your first home, an RRSP is right for you. “You’ll be able to take advantage of the HBP, which allows you to take a certain amount from your RRSP and put it towards your down payment. But do you have other funds to afford a home? Purchasing property comes with other expenses too: notary fees, renovations, and furniture purchases, for example. These are fees that aren’t included in your down payment or in your mortgage. You’re better off saving up for all of that beforehand,” Pung advises.
Job: Clinical nurse in a hospital
Catherine and her girlfriend would like to start a family in the near future. In Canada, if you want to use assisted reproduction services, you need a significant amount of money – about $10,000, depending on the clinic and the type of treatment. And of course, this doesn’t include all the expenses related to becoming new parents, such as the costs for equipment and furniture (stroller, crib, etc.), and the annual recurring expenses for a baby (food, clothing, etc.).
To achieve their dream of being parents, Catherine opened a savings account. She deposits different amounts every month (her paycheque fluctuates with her schedule), but she does it consistently. The little things she does every day help her grow her savings. By looking for the most affordable jar of tomato sauce when doing groceries, for example, and by cutting down on $5 pints that end up costing way more than that, Catherine managed to save $3,000 in three months.
A savings account can be beneficial for a short-term goal like a trip or, in Catherine’s case, starting a family in the near future. Here’s another tip: savings accounts can also be used as an emergency fund if needed… Although Pung recommends a separate savings account for each objective.
“You could open two savings accounts: one for your emergency fund and the other to start a family. It will help you stay motivated. If ever you have to use these funds after you’ve lost your job, you won’t dip into the money you’ve saved for your goal.”
“Having a child is expensive. All the more reason why you should prepare. If you have a child, that doesn’t mean you don’t still have a mortgage to pay off, or that you should stop saving for your retirement. That’s why it’s important to have a budget. When you know how much you need for your expenses, you also know what you have left each month to put towards your savings,” the expert adds.
Job: Editor for a media company
Julian has worked full-time since he got his job and takes part in his employer’s RRSP program. He’s been a property co-owner for three years, and divides his paycheque between his recurring expenses, his credit card bills, his mortgage (about $1,500/month), and contributions to his TFSA. Right now, he doesn’t have a budget.
“I don’t contribute to my TFSA diligently – only when I have a specific goal in mind,” he explains. What’s his specific goal at the moment? “Moving to Helsinki, Finland in two years.” This is a major decision whose actual costs he hasn’t yet calculated, but he’s thinking about funding this dream in part by renting out his condo while he’s away. Currently, Julian deposits $300 a month into his TFSA, which comes up to about 10% of his income.
“Usually, we recommend that young people save at least 10% of their income, regardless of the vehicle – in a TFSA, in a savings account, or in a collective RRSP set up by their employer. They’ll save even more when their salary increases. The important thing is to start saving while they’re young.”
According to the expert, you should consider a TFSA when you want to save up for a trip. Contrary to RRSPs, you won’t pay any tax when you withdraw the money for your travels, because this was already covered before you deposited the money. Plus, with a TFSA, the interests you generate are sheltered from tax, so you’ll have more to spend on your trip.
Saving systematically (by setting up automatic transfers) is a very practical way to save. You determine an amount to set aside and automate the process so the money is automatically transferred to your account as often as you decide. You can even do all of this online!
Saving doesn’t mean saying goodbye to your social life. “Try to see if there are any expenses you can cut down on. Otherwise, take a look at non-essential expenses and ask yourself if you could scale any of them back. Here’s an example: buying pre-made meals at the grocery store vs. cooking yourself. Could you cook more often and save on costs? No amount is too small when it comes to saving.”
If you have debts, especially with a high interest rate, you should pay them off before saving. In some cases though, you could do both. “The important thing is to avoid having it harm your credit score. Ideally you should always pay off your credit card in full, but if that’s not possible, it’s important to pay the minimum balance by the due date.”
“You should also think about planning for your retirement, no matter how old you are. I know that when you’re 30, you want to enjoy life and aren’t really thinking about retirement. But the younger you start, the more money you’ll have for your retirement.”
Instead of comparing yourself to others your age, consider meeting with an advisor. “They’ll ask you about your goals and, together, you’ll determine the best strategy for achieving them.” You’ll see – it can be exciting to take control of your finances and watch your money grow.
Want to discuss your projects with an advisor? We’re here to answer your questions.
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