Knowing how to save money is a key skill in life, and one that we should all take the time to learn. Learning how to save money is critical at any time of year, and even more so during tax return season. During this time, we will all be trying to do the same things – either minimizing the amount owing or maximizing the refund! It is possible to save money in many different ways, but the best way is to save in an account dedicated to that purpose. When it comes to the top ways of knowing how to save money, there are two easy and beneficial methods – RRSPs and TFSAs.
How much money should you save?
There is no right or wrong answer to this question – you should save what you can afford. A typical indicator is to save around 20% of your income, especially for any life events or emergencies when you may need it. By preparing a budget, it can help you to know how much is a reasonable and affordable amount for you to save each month. Equally, setting up an automatic transfer into a savings account on pay day can help you to put money away without the temptation to spend. The sooner you begin to save, the sooner you begin to begin to benefit from compounding and having more money overall.
RRSPs (Registered Retirement Savings Plan)
In Canada, a RRSP is a retirement investment account with the goal of helping you to save for retirement. It can be used to purchase investments including mutual funds, stocks, and bonds. The great thing about a RRSP is that you do not have to pay any tax on any interest, dividends, or capital gains earned. For every dollar contributed into an RRSP, your taxable income is reduced by that same amount, making it a great way to save money. Your contribution limit for the year is 18% of your prior year’s income up to a maximum of $27,830 (as of 2021) plus any unused prior year’s room. However, when you go to take out the funds from your RRSP, you will be taxed on the withdrawal. Therefore, if you invest in RRSPs now when you have a large income, you reduce your current tax owing. When you go to withdraw your RRSPs upon retirement, your income will likely be in a lower tax bracket, thus reducing the tax you pay.
TFSAs (Tax Free Savings Account)
A TFSA works in a similar way as an RRSP, except your money is available to you any time you want it. This is beneficial if withdrawn during retirement when your income is lower. Non-deductible contributions are made into a TFSA and over time accrue interest, making them another great example of how to save money. Upon withdrawal, neither the contributions nor the interest accrued on the contributions are taxed. The maximum contribution in a year is $6,000, and up to $75,500 for 2021 if you have made no prior contributions. Not only are TFSAs non-taxable upon withdrawal, but any person over 18 can contribute. There is also no age limit to when you can contribute, and it will not affect your eligibility for federal income-tested benefits and credits such as: Old Age Security, Guaranteed Income Supplement, and the Child Tax Benefit.
These are savings tools that almost every financial advisor wants you to take advantage, and with good reason. If you have not been availing of the tax breaks from accounts like these — they are absolutely the right place for you to start saving.
Everyone is different and everyone has a different financial plan in mind when it comes to saving money. Most importantly you never want to stretch your budget. When it comes to thinking about the future and retirement, these are two very common investments that may be beneficial to you are are a great starting point when it comes to how to save money.
To talk to our professionals about these or other money saving tips, contact us at 310-4321, email us, or visit our nearest location for a free consultation. You can also fill out our free assessment form online and one of our representatives will contact you directly.