Savings (Spending Category Part 8)

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Overview
“Savings” is part 8 of my writing series. To see full complete spending categories, read my February 2016 newsletter at www.PrudentMoneyCoach.com. This month, I’m going to write about savings.


Introduction
There are so many things I can write about savings. Sure, everybody knows that you are supposed to save. But how? And for what? Why should you save when credit is everywhere – credit cards, line of credit, personal loans from family and friends, etc. Well, I can tell you that living with debt is no fun. It puts stress on you and you always have this burden weighing heavy on your mind. I want to write about why they should save, and where to put the money.


Emergency Fund First!
Everyone needs an emergency fund because emergencies do happen. Here’s something I have heard often from others and experienced it myself earlier in life. Just when I was ready to save, to try to not spend, and to build a nice cushion, things happen that require money. It could be a car repair, a broken computer, an illness, a wedding invitation from your dear sibling who lives far away, or death in the family, etc.

When an emergency happens, you would dip into your newly-accumulated savings, and you would be broken hearted thinking “I’ll never be able to save. There are always things that come up and there will always be things to be paid. Forget about savings!!” Then you may lose heart and stop trying to save. “Why bother?” you thought.

I think you will not be able to have a true savings account until you have an emergency fund set aside. Let’s be honest, things happen. You want to be ready with your cash when it does happen. So, the first step before having a true savings is to have an emergency fund set aside. You can start with whatever amount of money. Aim to have $2,000 set aside (things are expensive here in Canada, especially if you live in the Lower Mainland). Ideally, you should have your emergency fund equivalent to three to six months’ worth of living expenses.

Think about this - it’s cheaper to borrow from your own savings and pay back yourself than to borrow money from credit cards, line of credit, banks, payday loan, or others. So, start your rainy-day fund now.


Save for a Specific Purpose
If you’re just saving money without any specific purpose or goal, you probably won’t be saving diligently. But if you have a goal in mind, you’d work hard trying to find ways to achieve your goal faster. For example, if you’re using an old car and you know that you will need to replace the car soon, you can start by determining what car you would like to purchase, how much it costs and how much time you have. If you want a $30,000 car in 5 years, that would mean you need to save $6,000/year, or $500/month. This is on top of the cost of maintaining your current car.

Here is another example. You want to buy a home with 20% down payment to avoid CMHC (Canada Mortgage and Housing Corporation) Mortgage Insurance fee. If you are aiming for a $700,000 home, you need to save $140,000. If you would like to purchase a home in 5 years, you need to save $28,000/year or $2,333/month. You could find an additional job and dedicate all the income towards your goal, or if you’re not getting additional income, you could trim your expenses by $2,333. Alternatively, you can tailor your goal. For example, instead of 5 years, you probably could delay your purchase for another 3 years, so you have 8 years to achieve $140,000. This means saving $17,500/year or $1,458/month. Remember though that the amount saved is after tax, which means you need to earn more in gross income.


Utilize Tax Free Savings Account (TFSA)
The government is encouraging people to save by allowing interest not to be taxed. Take advantage of it. If you do not know yet, you can save up to $46,500 tax free. Here is the breakdown.
From 2009 to 2012 = $5000 * 4 = $20,000
From 2013 to 2014 = $5,500 * 2 = $11,000
2015                                              = $10,000
2016                                              = $5,500
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Total                                             = $46,500

If you have a spouse, you’d be able to save up to $93,000 tax free between the two of you; that would be a nice chunk added to your other sheltered savings (RRSP, RESP, etc.).

Now, I don’t recommend using TFSA account as your day-to-day account; meaning once you put money in there, only withdraw if you have an emergency, because Canada Revenue Agency (CRA) needs to track your deposit and withdrawal. Use your chequing account for your day-to-day activities.


Seek Better Interest Rates
Many online banks do not have store fronts, which means lower operating costs. In turn they can provide higher interest to clients. If you are comfortable with online banking, take advantage of this. Some traditional banks also have a version of their e-savings. You manage your own money, they save on cost, and you get a slightly higher interest rate. A win-win situation.


Conclusion
Everyone needs an emergency fund because emergencies do happen, and it’s best to store and grow your savings in a tax-free account. Before you could truly say you have savings, you need to have emergency fund tucked away for rainy days. Recommended emergency fund is 3 to 6 month’s worth of living expenses. Start with any amount you have and add to it regularly. Next step would be to save towards your financial goals. Take advantage of sheltered savings program such as TFSA, RRSP (Registered Retirement Savings Plan) and RESP (Registered Education Savings Plan). Enjoy watching your money grow.
 
For more help with reducing your money-related stress, contact me at (six zero four) 728-5139 or Effie[at]PrudentMoneyCoach[dot]com. Take advantage of my free first assessment meeting to see if we are a good fit. 

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