How to manage your money with a savings plan

Saving is an important part of managing your money because it can help you achieve major life goals. In this guide, we’ll discuss how a savings plan can help you, the types of registered plans available in Canada and how to start your own savings plan.

What is a savings plan and should I use one?

A savings plan is an intention to save a certain amount of money over a specified period of time. It can help you achieve your life goals, such as buying a house, retiring or going to school. The sooner you start contributing to a savings account, the easier it will be to reach your goals. Plus, the Canadian government makes it even easier to save by offering tax breaks when you use a registered savings plan.

Before starting a savings plan, it’s wise to build an emergency fund first. You should also consider eliminating high-interest debt before starting a savings plan.

The 4 types of registered savings plans available in Canada

A registered savings plan is a special type of savings account that is registered with the Canada Revenue Agency (CRA). Being affiliated with the CRA means these types of accounts have tax benefits, including deferred or avoided taxation. The catch is that there are specific withdrawal and contribution limits to consider when using these savings accounts.

Here are the 4 types of registered savings plans available to Canadians:

• Tax-free savings account (TFSA): An account that allows you to save money for virtually anything. Any investment income earned on the saved money is tax-free.
• Registered retirement savings plan (RRSP): An account that allows you to save and invest for retirement. Money that is deposited or invested into an RRSP won’t be taxed until it is withdrawn.
• Registered education savings plan (RESP): An account that allows you to save and invest for your child’s post-secondary education. Income from an RESP is taxable when it is withdrawn, however, most people do not pay tax on the funds because they are in the lowest tax bracket while in school.
• Registered disability savings plan (RDSP): An account that allows you to save and invest to support a person with a disability. Money withdrawn from an RDSP is normally tax-free, however, you do need to pay taxes on income that the RDSP earns.

Savings plans for retirement

For most Canadians, the starting point of saving for retirement is with a registered retirement savings plan (RRSP). However, individuals can also save for retirement using their tax-free savings account (TFSA). Both of these registered accounts have significant tax benefits that should be taken advantage of before saving for retirement in a non-registered account.

Some employers offer RRSP matching as an incentive for their employees to save for retirement that is subsidized by the employer. Normally, this program is executed through the employer’s payroll system. A portion of the employee’s income is deducted from their pay cheque and the employer contributes whole or part of the amount as well. In other words, the employer matches what the employee contributes to their RRSP. If your employer offers this kind of program, consider taking advantage of it.

How much do I need to save for retirement?

It can be hard to save without a goal number in mind. On average, Canadians believe they need to save $2.27 million for retirement, according to a Finder study. Although, 23% of Canadian adults are unsure of how much they need for retirement. Some financial planners say $1 million is the golden number.

The truth is, there isn’t a magical number that everyone needs to save for retirement because the cost of living and lifestyle varies from retiree to retiree. It’s best if you create a budget for your retirement life and work towards that figure. If you’re stuck or unsure, working with a financial planner can help you navigate the retirement saving process.

Savings plans for education

Many parents open a registered education savings plan (RESP) for their children when they’re born. If the child chooses to pursue post-secondary education, a withdrawal can be made from the RESP to pay for the education in part or in whole. Individuals can also save for education costs using a tax-free savings account (TFSA).

How the Lifelong Learning Plan (LLP) works

Later on in life, some individuals pursue education, but may have trouble affording the cost. If you have the cash in your registered retirement savings plan (RRSP), but don’t want to face harsh tax penalties, there is a loophole called the Lifelong Learning Plan (LLP).

Under the LLP, individuals can withdraw up to $10,000 in a calendar year from an RRSP to finance full-time training or education for themselves, a spouse or common-law partner. The only catch is that you must repay the withdrawn amount over a period of 10 years. Normally, a 10th of the withdrawn amount is repaid every year. Consider the LLP as a way to borrow money from your RRSP to finance education costs.

Should I start a savings plan if I’m still paying off debt?

There’s a clear tradeoff or balance that occurs between paying debt and saving – one involves money going out and the other involves keeping money in. Ideally, you should try to find a balance between saving and paying off debt. The earlier you start saving, the easier it will be to retire and achieve other life goals. At the same time, factors like credit card debt or student debt can haunt you down the road, so a portion of your income should go to eliminating debt too.

A good strategy is to start paying off high interest debt, generally with interest rates between 9% and 20%, before you even start saving. The rationale is that high interest debt costs you the most amount of money, so by paying it down first, you’re saving money in the long run.

With that in mind, you should have some sort of emergency fund, even if you’re not committed to a savings plan yet. A good benchmark for your emergency fund is at least 3 months worth of expenses. The reality is, bad things happen to everyone. An emergency fund can help prevent you going into further debt to cover emergency expenses.

How much should I put towards a savings plan?

Unfortunately, there isn’t a one-size-fits-all solution when it comes to a savings plan. How much you save depends on your income, expenses, financial goals and outstanding debt among other things. Most people incorporate a savings plan into their budget by calculating their income and expenses, then allocating what’s left to savings.

There is a savings strategy that is generally accepted by everyone called the 50:30:20 rule. First, determine what your earnings are then divide up the funds into these categories:

• 50% is for needs. These are costs that are non-negotiable and are required for you to survive, such as rent or mortgage payments, groceries and utilities.
• 30% is for wants. Everyone deserves to have some fun and that’s what this category is for. These funds could go to clothes, vacations, dining out or entertainment. Virtually everything that is considered non-necessary falls into this category.
• 20% is for savings. This category is dedicated to saving, building an emergency fund and paying off debts.

Keep in mind that the 50:30:20 rule is meant to be a benchmark. No one will be able to divy up their finances this way perfectly, but it’s a good starting point. Below is an example of how to calculate where your money is going using the 50:30:20 rule.

Need help figuring out how much to save? Check out Finder’s savings calculator tool.

Example: How does the 50:30:20 rule work?

Sofie earns $4,000 in gross income a month and $1,000 is deducted from her pay for employer deductions. Her net earnings are $3,000 which means $1,500 (50%) goes towards needs, $900 (30%) goes to wants and $600 (20%) goes towards savings every month.

How to get the most from your savings plan

Saving isn’t always easy, but here are some tips to make the most of your savings plan:

• Create a budget. Determine all your income and expenses, then calculate how much you can afford to save.
• Set up automatic payments. For some people, “setting it and forgetting it” is the best way to save. It can also be helpful to set up payment reminders to better manage your cash flow.
• Keep a goal in mind. Saving aimlessly can make it hard to continuously motivate yourself. By keeping a specific goal in mind, such as your dream home or an amazing vacation, it can be easier to continuously save.
• Invest to lock in savings. When you see cash sitting in your account, it can be tempting to spend it. By locking your savings into investments, the temptation can be eliminated. In addition, you’re earning money on your money by making the choice to invest. Just make sure that you have some cash handy for emergencies.
• Reassess your finances routinely. Income and expenses change which means your budget will change too. You should also take a moment to reassess costs and cut out what you don’t need. This is also an excellent opportunity to reflect on your progress.

Compare savings accounts

If a registered savings plan isn’t the right fit for you now, consider getting a high interest savings account instead. Compare features of savings accounts available in Canada in the table below.

Bottom line

Nearly everyone has a life goal, such as to retire, buy a home or go back to school. These goals come with a price tag which is why it’s important to commit to a savings plan. As a Canadian, there are registered savings accounts that can help you achieve your savings goals faster. Once you’ve taken advantage of these, you can open a regular savings account too.

Savings plans FAQs

• Should I open a savings account online or at a bank branch?

  That depends on what you're comfortable with. Online high interest savings accounts usually offer a more competitive interest rate, but they don't have branches you can visit if you want in-person help, and it can be more difficult to deposit cash.

• Is a savings account the best choice?

  That depends on what you're looking for and how long you have to save. A savings account lets you add money regularly and gives you access to your money when you need it. However, if you don't need access to your money for a few years, a Guaranteed Investment Certificate (GIC) might offer a better interest rate. Many savers use a combination of the two.

• I need money now, and my savings account doesn't have enough. What options do I have?

  If you don't have enough in your savings account to cover an emergency expense, a personal loan can be a useful option. These tend to have high interest rates, so you'll need to budget for how to pay it back.