Kickstart your financial planning with this guide to saving and investing
Saving and investing doesn’t have to be complicated. The sooner you start, the more you’ll build to fund your future.
Saving and investing doesn’t have to be complicated. The sooner you start, the more you’ll build to fund your future.
Maybe it’s a condo in the heart of the city. Or having the freedom to travel. It could be having a nest egg set aside for a rainy day. No matter what your dreams are for the future, getting your saving and investing started now, whatever age you are, can help you realize your biggest dreams.
It can be intimidating to get started. Learning all those new-to-you financial terms can feel like you’re learning an entirely new language.
From identifying and setting goals to becoming familiar with the investment options available to you, credit union experts are here to ensure you have the information you need to get your savings and investments started.
You can do it, and this guide can help you get there. Let’s look at how you can get started.
Start by thinking long-term. Think about where you want to be and what you want to be doing 10, 20, 30, or more years from now. Driving a sports car with the top down? Sipping espresso at a cafe in Europe? Living comfortably in your own home?
Identifying your goals for the future now is a great way to get started. Keeping those goals in mind along the way can also be great motivation for staying on track.
Short-term goals should be simple, specific, and most importantly, reasonable. Smaller goals will help you move toward the bigger, long-term goals that may seem out of reach right now.
HONEST TIP: What makes a goal long term vs. short term?
When it comes to investing, long-term goals are typically 10 years in the future or more. Short-term goals, by contrast, tend to be five years or less.
Now that you have an idea of where you want to be, you can begin to think about how you want to get there. You don’t need to be flush with cash to save and invest. In fact, a little can go a long way, especially when you calculate how much to save for retirement now, and how it will grow exponentially.
Here are some easy saving steps you can take to plan for success.
When you’re starting a savings plan, it’s important to make sure you’re either in or working towards being in a good financial position.
This doesn’t mean you need to be debt-free, just that you’re managing your debt well and have a plan for paying it off.
Ideally, an emergency fund should include enough money to cover three months of your basic living expenses. If you don’t have this much money set aside, don’t worry. You can make this part of your savings plan.
If your company has this kind of plan, contribute to it to maximize your investments. Often, employers will match a portion of the money you invest which can help you build up your investments that much faster.
Wondering if your employer’s pension plan is your best savings tool for retirement? Head to our guide to retirement to learn more about it and other saving and investing plans.
We’ve all heard this one before. But how many people actually do it? Treat your savings like any other monthly bill. When you get paid, put aside a set amount toward your savings right away.
Not only will paying yourself first help you commit to a manageable savings plan, it will also help you save more and faster.
Build your savings and investments into your monthly budget and stick to it. If you don’t already have a budget, check out our guide to budgeting to get started.
Once you’ve figured out how much you can save, you need to choose the right savings plan to meet your goals. Not sure what that might be? Your credit union can help you decide which is best for you.
If you find it hard to remember to put money aside on a regular basis (or even if you don’t), set up monthly, bi-weekly, or weekly pre-authorized (i.e. automatic) contributions to be transferred directly from your account to a savings or investment account.
The sooner you set up a pre-authorized plan, the sooner you’ll start earning interest on your savings.
Seems obvious, right? In reality, it can be a lot harder than it sounds. Overspending contributes to your debt which can impact your ability to save.
Set a budget and stick to it. Try using cash instead of credit for everyday expenses—counting out cash forces us to pay attention to the dollars and cents. Track your spending. Put any extra money you have toward paying down your debt. Every little bit counts!
Yes, it is. At the most basic level, investing your money means that you’re putting your money to work and in exchange, your money earns a return. There are many ways how to invest your money, each with varying levels of potential risk and potential returns.
Registered savings refer to savings plans that are registered with the Canada Revenue Agency (CRA). Some common examples are Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).
You can hold different kinds of investments, from GICs to stocks and bonds, inside of your registered plans. These have built-in tax advantages that help you work toward your goals. They also have certain limits and rules around how much you can contribute and how much you can take out.
| TYPE | DECRIPTION |
|---|---|
| Guaranteed Investment Certificate | A guaranteed investment certificate is often called a GIC or a term deposit. When you invest in a GIC, you deposit a set amount of money and lock it in for a fixed period with a set rate of return. Like the name suggests, the original amount of money you choose to invest–the principal–is guaranteed. |
| Bond | A bond is a contract between a bond issuer (typically a government or a business) and a bond holder (the investor) where the bond holder lends the issuer money that the issuer agrees to pay back on a set date with a set amount of interest. Unlike other forms of investment, bonds are not guaranteed, which means they can carry slightly more risk. |
| Stock | A stock is a share in the ownership of a company. If the company does well, shares increase in value and in some cases, companies will also pay out a portion of their profits to their shareholders in dividends. If the company does not perform well, the value of its shares may decrease. Again, unlike other forms of investments, stocks are not guaranteed. |
| Mutual Fund | A mutual fund is a professionally managed collective investment that pools money from many investors to purchase many kinds of securities like bonds, stocks, etc. The original amount you invest is not guaranteed, and depending on the mutual fund, the potential for returns and potential risks can vary greatly from one mutual fund to another. |
Separate from the above list, non-registered savings are investments (GICs, mutual funds, stocks, bonds, etc.) that are not held inside a registered savings plan, making them different from an RRSP or TFSA. While these kinds of investments can be more flexible when it comes to contributions or withdrawals, they don’t carry the same kinds of tax advantages that registered savings offer.
HONEST TIP: Understanding risk tolerance
Risk tolerance refers to your ability to handle fluctuations in the value of your investment. There is no right amount of risk; it depends on what makes the most sense for you.
Risk can be calculated based on how much time you have to invest, the amount you’re able to put away, and your own personal preferences and tolerance. Connect with a credit union expert to see how much risk is right for you.
A Registered Retirement Savings Plan (RRSP) is primarily designed to help you save for retirement, while a Tax-Free Savings Account (TFSA) allows you to save for your short-, medium-, and long-term goals by growing your investments tax free.
Which one is right for you? It all depends on what you’re looking to save for. Consult our chart below, and consult our RRSP vs TFSA guide for an in-depth comparison of both.
| CONSIDERATIONS | TFSA | RRSP |
|---|---|---|
| Taxes and savings | You can’t claim money you contribute to a TFSA on your income tax, so putting money into a TFSA won’t affect your claim. | You can claim contributions on your tax return, which will lower your taxes in the year that you made the deposit. But you pay taxes when you withdraw. |
| Taxes when you withdraw* | Nothing. Because you pay taxes on the money up front, you can save for years. You won’t pay tax when you withdraw it. And better still, in most circumstances, you won’t pay any tax on any interest or returns earned. | Any money that you withdraw from your RRSP is treated like income. This means that you will pay tax on any amounts that you withdraw based on your income tax bracket. |
| Contribution limits** | To find out the TFSA limit for this year visit the CRA website. | To find out the RRSP limit for this year, visit the CRA website. |
*There are some kinds of investments that pay foreign dividends that may be taxable, even inside of a TFSA. Talk to your financial expert for more information.
**Withdrawals can be made under the Homebuyer’s Plan and Lifelong Learning Plan. These plans are administered through the CRA. To determine if you’re eligible to participate, visit the CRA website.
Depending on your account and how you’ve arranged your investments, you can potentially withdraw from your TFSA and RRSP at any time, or you may have to wait until they mature. It’s important to understand the pros and cons before making any withdrawals.
Both TFSAs and RRSPs have limits on the amount you can contribute each year, and that accumulates for both each year. What this means: if you don’t contribute the maximum each year, any unused contribution room from those years is added onto your contribution limit. There are other factors that influence your contribution room, so it’s important to check your Notice of Assessment, or contact the CRA directly, to find out your individual available room.
With your RRSP, you only accumulate new contribution room if you’re earning an income and filing taxes. What that means: if you’re not earning an income, you may not be able to contribute to it. If your employer already contributes to a pension plan and maximizes your contribution room, you’re also not eligible to contribute to an RRSP.
Contributions that exceed your contribution room are taxed annually, so they’re not recommended. TFSAs still have set annual contribution limits but, unlike RRSPs, these are not set based on income. This makes TFSAs a great option if you’re not earning a traditional income or have maxed out your RRSP contribution room.
There’s also no penalty to withdraw money from a TFSA which means they are a great shorter-term savings option.
| PROS | CONS |
|---|---|
| TFSA | |
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| RRSP | |
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*There are some kinds of investments that pay foreign dividends that may be taxable, even inside of a TFSA. Talk to your financial expert for more information.
**Withdrawals can be made under the Homebuyer’s Plan and Lifelong Learning Plan. These plans are administered through CRA. To determine if you’re eligible to participate, please visit the CRA website.
RRSP loans can be a good choice if you have contribution room, but are faced with a cash shortage. Make sure you have the ability to make the payments on the loan during the term. A good strategy is to use the RRSP loan to maximize your contributions now and then pay down (or even pay off) your RRSP loan with your potential tax savings.
If you’re thinking about an RRSP loan, set up a meeting with a credit union expert. They can help you weigh your options and make savings and investment decisions that are right for you.
The best investment for you will depend on your short and long-term goals. That’s because as time goes on, your needs will change. You may go from being a part-time barista to being a full-time CEO. Maybe you’ll get married or start a family. Your goals and priorities can also shift as you mature and your situation changes.
It’s a good idea to check in with your credit union regularly to make sure your investments remain aligned with your evolving needs and goals.
HONEST TIP: What are socially responsible investments?
Ethical and socially responsible investments are products people are looking for with increasing regularity. But this doesn’t mean your money is invested in kombucha operations and organic kale farms.
Socially responsible investments often must meet certain criteria, such as investing in companies that have positive social impacts—organizations with good environmental track records, for example—to be considered ethical. These investments can be every bit as profitable as standard investments, and you can get them from your credit union.
When you close your eyes and picture your retirement, what does it look like? Are you walking toward the 18th hole with three of your oldest friends? Travelling the world? Sitting in a house you’ve owned for 20 years playing with your grandkids?
While retirement may seem like a distant dream from where you’re sitting right now, getting started early will help get you there comfortably. If you haven’t started planning yet, don’t worry. And if you have, great!
Ask yourself some questions to help the future you dream of become reality:
Once your personal questions are answered, these more detailed questions can help make sure you're on track to save enough for retirement:
To get the future you’ve been dreaming about, you need to start planning now. It’s a great idea to connect with your credit union, where an expert will work with you to make sure you have a clear understanding of your current financial situation.
And that will help you set short-, medium-, and long-term financial goals, and determine the best plan to get you there.
Credit union experts are here to support your financial journey, whether you're just starting out or well on your way. Take the first step today.
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