RRSP’s and You: Saving For More Than Savings Sake
Have you ever thought, “I want to save but I’m not sure how to properly approach it?” You’re definitely not alone.
“Saving for the sake of having a savings account is not always the best strategy,” said Jaco Badenhorst, Wealth Advisor, Credential Asset Management and Fusion Credit Union. “It’s important to have goals. Ask yourself: what are you saving for? Are there multiple things? How long will it take you to reach your goal? Saving can be very difficult, but having goals really helps motivate people to put money away for something that they feel is important and meaningful to save for.”
These are important to consider. Goals bring us down to earth a lot and keep us motivated for the long term. Try setting a goal to go on vacation, buy a car, or complete your dream kitchen renovation. It’s also important to have a healthy balance of long, mid and short term goals:
- I want to retire at 65 = long-term goal
- I need a new car = short term
- I’d like a vacation = short term
- Renovate the house = mid term
- Buy a new house = mid to long term
How do we balance all these goals? More importantly, can we balance all of them? The answer is yes.
“First, portion out your individual goals,” said Badenhorst. “How much will you need to put away? Are you comfortable with it? Is it in your budget?”
You have to be strategic with your portions and where you invest them. A useful tool to measure your potential savings is something called the ‘Latte Factor’. It’s an easy example to follow: Add up the cost of your cup of coffee in the morning and see how much is available. Now that doesn’t mean that you should give up your morning coffee, but it does help to put it into perspective. It helps you to ask the question “If I’m saving for a new car, should I stop to buy that cup of coffee or would it be better to make it at home. How important is that major purchase down the line, compared to my morning cup of coffee?”
Now this doesn’t apply strictly to coffee, it can be any discretionary expenses that you make on a regular basis. At the end of the day, it can be a difficult decision to make, but it’s a great start to put your daily expenses in perspective and help you with your budgeting decisions.
“Second, remember to start early.”
Emma and Jason have both decided to put $30,000 into an RRSP account, but they’ve come to this decision at different times.
Emma is 20 years old when she starts saving $2,000 per year with an interest rate of 1.5%. When she is 35, she’ll have $30,000 in contributions plus interest of $3,389. By 45 years old, Emma will have earned a total of $8,789.
Jason doesn’t start putting money away until he’s 35, but he saves $3,000 per year at 1.5% for 10 years. His total savings will also equal $30,000. Even though he put away more than Emma annually, by the time Jason is 45 years old, his total interest earned will only be $2,123, far less than the $8,789 that Emma has earned.
“It’s not hopeless if you didn’t start saving early, but you can make it easier if you start sooner. Better late than never!” adds Badenhorst.
Remember to start early.
Badenhorst says it’s important to know what investment options work best with your life and your goals. “GIC’s earn a steady return, but are locked in for the investment term. Mutual Funds fluctuate in value, but they can potentially earn more than GICs depending on your risk tolerance and time horizon. That helps with some extra growth if you have a longer time horizon for your goals, to ride out the highs and lows of investing in Mutual funds.”
RRSPs are great for long-term savings goals, like retirement. Any amount you contribute (up to your eligible contribution room) can be deducted from your income and reduces your tax bill at the end of the year. The tax refund generated from this can then be used to help fund your TFSA or any future RRSP contributions.
“Keep in mind that even though RRSPs grow tax free, the amount is taxed when it is taken out. So the goal is to defer withdrawals until a time where your income tax bracket is lower, like in retirement. On the other hand, If you are in a lower tax bracket, for example if you are a student, work part time or if you are currently retired, then TFSAs are a great savings option” Badenhorst said. “Like RRSPs, TFSAs help you grow your assets tax free; but, unlike RRSPs, it and can be redeemed at any time without incurring a tax bill, which is ideal for short to mid-term goals, like saving for a car or a vacation.”
Set it and forget it
If you have a chequing account where your payroll is deposited, you can set up a pre-authorized contribution to an Investment account. This means that every pay cycle, money will automatically be drawn from that account and contributed to an investment vehicle of your choice. You can set it and forget it.
Besides setting up automatic savings, we also recommend that people do some research within their workplace. Does your employer offer a Group RRSP plan? If they do, we encourage you to sign up.
“Many employers that offer a Group RRSP will take a portion immediately off your paycheque and deposit it to your RRSP on your behalf, so you don’t miss it. Some will even offer to match your contribution! That’s potentially free money for you and saves you bit of withholding tax up front. I would encourage to talk to your Human Resources department to see if your company offers a Group RRSP.”
It really comes down to your goals and how much you value those goals
The key is understanding your goals and finding an investment that works best for you. “All the financial terminology and rules can be very complicated, especially if you’re not familiar with it or working with it everyday. It’s our job to make it as easy for you as possible. We’re here to help people navigate the waters. It’s our mission to make you feel comfortable about your money and your choices.“
At the end of the day, it really comes down to your goals and how much you value those goals. Are you saving enough to reach your goals? Can you afford to not reach those goals if you don’t have a proper savings strategy in place? Should those goals be changed? These are all important questions to consider, and they illustrate why it’s super important to set goals early and start on your path to saving.