First of all, take the time to assess your personal and financial situation. Next, try to anticipate what you expect to happen in the next few months. What are your priorities? What are your short-term and longer-term goals? For example, do you expect money to be tight in the coming months? How are your RRSPs and TFSAs doing? Do you have any major renovation plans in the near future? The answers to these questions will help you choose the best strategy for you.
What should you do with your extra money? Cash it?
1. Treat yourself
If you’re dreaming of spending your extra cash on a vacation, a pool, or a gourmet road trip, you certainly can. But take the time to look at your finances and make sure this money couldn’t be put to better use for something else. And more importantly, think about how it affects your taxes. If this extra money is from a bonus, it will be added to your income. So, consider setting some aside if your employer has not already deducted your provincial and federal taxes from it.
2. Add to your emergency fund
If you don’t have an emergency fund, creating one is worth considering. It’s a great way to have peace of mind when unforeseen events pop up, such as the loss of your job or extended sick leave. Your emergency fund should be large enough to cover three to six months of expenses.
If you put it in a savings vehicle, your emergency fund could earn interest and increase in value over time. You could also set up automatic withdrawals in your account to make sure you make regular additions to it.
3. Pay off your debts
If you have debts, such as lines of credit and credit cards, a personal loan, car loans, or student loans, you could use this extra money to partially or completely pay them off. Here are some tips on how to do it:
- Make a list of all your debts with the amount and interest rate.
- Prioritize debts with the highest interest rates first, since they usually cost you the most.
The goal is to achieve or maintain an acceptable debt-to-income ratio, which will make it easier to obtain financing from financial institutions. Then try to keep up your good financial habits.
4. Pay off your mortgage faster
If you already have an emergency fund and your debt is under control, you might consider using this additional cash flow to pay off your mortgage faster. That way you’ll be able to reduce the amortization period of your mortgage—and the amount of overall financing fees that come with it. Ask your advisor about any conditions that may apply. And if your interest rate is low and your home is appreciating, ask if this is the best option for you.
What should you do with your extra money? Invest it?
1. In an RRSP
If you want to invest your extra money, the registered retirement savings plan (RRSP) (RRSP) may be a great option. Did you get a bonus? Even if this amount is added to your gross income on your tax return, investing it in an RRSP could help you reduce your taxes for the current year. A maximum contribution limit is set each year, so be sure to check it and factor it into your financial plans.
If you want to have access to your extra money for the short to medium term, you may be better off with another option, since RRSP withdrawals are usually taxable.
However, if you’re thinking of using your RRSP to take advantage of the Home Buyers’ Plan (HBP) to buy your first home or the Lifelong Learning Plan (LLP) to go back to school, this may be a good option, since withdrawals are not taxable. Keep in mind that you will still have to pay these amounts back into your RRSP one day, in accordance with the rules governing these programs.
2. In a TFSA
If you’ve already used up your RRSP contribution limit or if you’re looking for more flexibility, investing your extra money in a TFSA could be the solution for you. This savings account presents a number of advantages:
- Any amount contributed as well as any income earned in a TFSA is not taxable, as long as you don’t go over your contribution limit.
- Unused annual contribution room rolls over from year to year.
- Unlike RRSPs, TFSA withdrawals are tax free.
3. In an RESP
If you have children, you could use your surplus cash to take out a Registered Education Savings Plan (RESP).
- Your savings are tax-sheltered.
- An extra 20% to 40% (depending on your province of residence) will be added to the amount you invest every year thanks to government subsidies, such as the Canada Education Savings Grant (CESG).
- It’s a great way to give your children the chance to pursue the education of their choice so they can achieve their full potential.
Good to know: If you’ve maxed out all your contributions to your registered plans, such as RRSPs, TFSAs, and RESPs, you could invest in non-registered accounts.
In short, surplus cash or not, the key is making saving part of your routine, whether you put away a little at a time or in big chunks. Month by month and year by year, you’ll watch your savings grow and be in a better position to make all your plans a reality, and ultimately enjoy a pleasant retirement.
Discuss your situation and your plans with an advisor. They can help you figure out the best options for you. We’re here to answer your questions.