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 the year, and even more so during tax return season. During this time, we will all be trying to do the same thing – either minimizing the amount owing or maximizing the refund! It is possible to save money in many different ways, but the best method 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 many ways to do so depending on your unique financial circumstances. In the following article, we outline the best strategies on how to save money in Canada.
How to save money in Canada
Knowing how to save money is the first part of accumulating savings. There are several tips and tricks for making it easier for you to save money, each of which we have listed below:
- Gather any loose change in a jar or container in your home. Every now and then, clear out your jar into your savings account and watch as your savings begin to grow slowly but surely.
- Pay yourself. As soon as you get your paycheque, put aside a portion of your pay and pay yourself before it goes towards bills or other day to day expenditures. Aim for a percentage that you can afford each and every month. You can automate the transfer to ensure it happens without thinking about it.
- Organize your savings accounts. In order to save, you should have the right savings accounts in place. This may include an emergency savings account, a savings account for large purchases like a house or a car, and a retirement savings account.
Create a savings plan
In order to stay on track when it comes to knowing how to save money in Canada, you need to create yourself a savings plan or a budget. You may want to create a spreadsheet to input your income and any known expenses you have each month. Once you have this data, you should look for how to cut back on your spending, or even how to increase your income. You can also make a realistic judgement on how much money you can reasonably afford to save each month. Having a savings plan requires discipline, but it is the best method when it comes to how to save money. You may find it empowering, as you can begin to plan out how best to save and where to cut back. It will certainly pay off in the long run.
How to save your money in Canada
A regular savings account or a chequing account is not the recommended place to save your money in Canada. They offer very low interest rates, and do not make your money work for you. Banks make their profits when they can lend out your money for long periods of time at high interest rates, which subsequently enables you to earn more interest. Alternative accounts like High Interest Savings Accounts and Term Deposits or Guaranteed Income Certificates are preferential for higher interest rates, so consider one of these instead.
High Interest Savings Accounts
The downside of High Interest Savings Accounts when it comes to knowing how to save money is the increased restrictions, but the benefits far outweigh the cons. Although you may need to commit to not accessing your money for a while, they offer much better interest rates. Once you find a competitive interest rate with a bank or credit union, open an account and begin saving as much as you can. These accounts are a safe way to save money with a good return.
Term Deposits or Guaranteed Income Certificates (GICs)
If you are happy not to access your savings for a year or longer, a Term Deposits or GIC is a great way to increase your interest rate. They will offer much more than a regular chequing account and even sometimes more than a High Interest Savings Account. With most banks and credit unions, you can begin to use a Term Deposit or GIC with just a thousand dollars or more.
Tax Free Savings Account (TSFA)
For many Canadians, TSFAs are a great way to save. They work in a similar way to an RRSP, except your money is available to you any time you want it. This makes it perfect if you are looking to withdraw during retirement when your income is slower. Currently, you can contribute a maximum of $6,000 and up to $75,000 if you have made no prior contributions. You do not need to pay any tax on the interest of your growth. Equally, when you withdraw your money, you do not pay tax on your contributions or interest. There is no age limit for contribution, and it does not affect your eligibility for federal income-tested benefits.
Registered Retirement Savings Plan (RRSP)
In Canada, a RRSP is an investment account with the goal of helping you to save for retirement. You can purchase investments like mutual funds, stocks, and bonds and 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. When you go to take out the funds from your RRSP, however, you will be taxed on the withdrawal.
The list of other ways for you to save money in Canada is not exhaustive. Other investments include money market funds, bonds, stocks, mutual funds, and so on. Should you wish to spend the money you are saving within five years, you should find something safe to invest in, like a High Interest Savings Account or a Term Deposit within a Tax Free Savings Account. All of these options are safe, and you will know where your money is for when you need it. If, however, you choose to save in a slightly riskier account like the stock market, you may not have the same reassurance.
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.
How to increase your income
Now you know how to save money in Canada, just where does the money come from? Although you need to create a savings plan, it can be good motivation for accruing additional income to put towards your savings. So where can you gain additional income to put towards your savings? Here are a few suggestions:
- Raises from work – be sure to put any extra income you are earning straight into your savings fund. As you are not used to having it, you will not miss it!
- Work bonuses – it is worth banking any bonuses you may get, as again you will not miss what you have not had before. Consider it surplus income.
- Overtime pay – in some roles, you may be able to volunteer for additional hours. If you can, it may be worth increasing your income for extra savings.
- Commission pay – it is worth saving a portion of any commission you may get paid to use towards something you will remember forever.
- Tax refund – use the money from a tax refund to boost your savings, or reduce the tax you pay by contributing towards an RRSP.
- Tax reassessment – if property prices have dipped in your area, ensure your tax assessment is still fair as you may be able to save some tax.
- Claim your expenses – if you are self employed or do your own taxes, it may be worth checking with a professional to ensure you are claiming all expenses.
How to cut down your expenses
As well as increasing your income, the other element of saving money is to cut your expenses wherever you can. Here are some tips for cutting back on your expenses, and how you can incorporate these into your savings plan:
- Assess your habits – there could be simple ways for you to save, like reducing your coffee purchases and giving up on smoking.
- Review your hobbies – we all like to spend time on our passions, but how much money do you spend? Assess the associated costs and see what you can cut.
- Look at your assets – is your car a gas guzzler? If so, can you downsize? How about the size of your house – do you really need that extra spare room?
- Be strict with yourself – review your credit card statements and see what you could go without, and put this into practice this going forward.
- Try sticking to cash over cards – experiment with using just tangible cash instead of racking up credit card debt, and see how much you save for a month.
- Review your debt repayments – if you are paying high interest rates on debt repayments, you could reduce your rate with the same or a different bank.
- If you are struggling to cut down your expenses due to debt repayments, it may be a good idea to speak to a Licensed Insolvency Trustee. As the only professionals legally able to file all forms of debt relief in Canada, they are well placed to advise you on your situation and gaining debt relief.
If you have further questions on how to save money in Canada, book a free consultation with one of Spergel’s Licensed Insolvency Trustees. We have been helping Canadians become debt free for over thirty years, and understand that everyone’s financial situation is unique. The sooner you address your finances, the sooner you can thrive. Reach out today, you owe it to yourself.