If you’re a newcomer to Canada, you’re probably working towards a lot of different goals. You know you need to save money to build the life you want, but you also want to enjoy the present. Here’s a list of tips that will help you plan for the future without making you feel like you’re sacrificing too much today.
Make saving a habit
The best way to save money is not to spend it. Even if it sounds easy, it can feel impossible at times.
You can start by setting realistic goals that are easy to track. For example, figure out how much money you need to save and how long it will take you. The earlier you start, the sooner you’ll get there. To streamline the process and help kickstart your saving habit, you can try automating the process by setting up automatic transfers once or twice a month. Whether you’re saving up for a house, a car or a vacation, this approach can help you set yourself up for success.
If you’re working towards more than one goal over the next few years, consider reaching out to a financial advisor who can help you decide what to focus on and come up with a savings strategy that works for you.
Make a budget
Making a budget will help you figure out how much money you can put towards your savings goal. To help with this, check out the My budget tool on AccèsD or the Desjardins mobile services app to get a clear picture of your finances. It separates your expenses into categories like food, telecom services and entertainment so you can see where your money is going and make adjustments.
Sticking to a budget and saving on a regular basis is the best way to reach your goals.
The joy of watching your savings grow
Let’s say you’re able to save $50 a week. In a year you’ll have $2,600. If you keep saving without taking any money out, you’ll have $26,000 in 10 years. And that doesn’t even include any interest you might earn, let alone compound interest.
The miracle of compound interest
Saving at a steady pace in an account that offers an interest rate that compounds yearly can really give your savings a boost. With compound interest, you don’t even have to think about it—your money will grow on its own!
Registered accounts to help you save
There are a number of registered savings plans and products you can use to save for a goal or on behalf of someone you care about. For example, maybe you’ve heard of the Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), First Home Savings Account (FHSA) or Registered Education Savings Plan (RESP). These 4 registered accounts are very popular and have many benefits.
Why save in TFSA1?
The TFSA is a tax-sheltered account that lets you earn interest and generate tax-free returns. That means you can withdraw funds at any time (depending on the terms of your investment) without adding to your taxable income*.
It’s perfect if you’re looking to save for:
- Medium-term projects such as vacations and renovations
- Unexpected events, such as car repairs or having to replace an appliance
- Additional retirement income over the longer term.
Key points about TFSAs:
- Withdrawals are not taxable
- There is an annual contribution limit ($6,000 for 2022), and any unused portion will accumulate
- Avoid making frequent withdrawals so your money keeps growing
- Your money grows until you need it and you have access to it at any time. Note that the annual contribution limit is available to tax residents of Canada. A transient foreign worker does not accumulate TFSA contribution room.
How does an RRSP2 work?
RRSP contributions are deducted from your taxable income. This registered account is designed for long-term savings, which makes it ideal for savings products and investments that earn compound interest. If you have a spouse, you can also contribute to their account. RRSP contribution room typically increases by 18% of your annual income. Certain types of income may be excluded from this amount. In other words, this year’s contribution room is based on last year’s income2.
An RRSP mainly allows you to:
- Save for retirement over the long term
- Reduce your taxable income and potentially receive a tax refund or a reduction in the amount of income tax payable in the short term. Over the short term, reduce your taxable income and the tax payable and potentially receive a tax refund.
RRSPs can also be used to achieve important goals:
- Purchase a first home: the Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 that is tax-free (but must be repaid)
- Go back to school: the Lifelong Learning Plan (LLP) allows you to withdraw up to $20,000 that is tax-free (but must be repaid).
What about the FHSA3?
FHSA stands for First Home Savings Account. It combines some of the features of the RRSP and TFSA. For example:
FHSA contributions are tax deductible, which can help reduce your tax burden.
If you meet the eligibility requirements, withdrawals are tax-free as long as you use them to buy a qualifying home.
Your FHSA contribution room increases by $8,000 a year, up to a maximum lifetime limit of $40,000.
RRSP, TFSA or FHSA: Which is best?
As you’ve seen, there are advantages associated with each of these two savings options. But if you combine them, you could get the best of both worlds. Let’s take the example of a home purchase where it’s a good idea to invest in an RRSP for your down payment. However, by also contributing to your TFSA on a regular basis, you can use this money for renovations or repairs on your new property, a win-win situation!
In addition, if you don’t contribute the full amount allowed to an RRSP or TFSA in a given year, it’s carried forward to the next year.
RESP: Save for a child’s education4
The Registered Education Savings Plan (RESP) was created to help you save for a child’s post-secondary education. In addition to your contributions, the account is funded by Canadian and Quebec grants that the account beneficiary (or beneficiaries) will be able to access once they enroll in full- or part-time studies at an eligible institution. This registered plan is also tax-sheltered.
GOOD TO KNOW
You must be a resident of Canada in order to accumulate TFSA, FHSA and RESP contribution room**.
**Temporary foreign workers do not accumulate TFSA contribution room.
For advice and guidance on choosing a savings plan that’s right for you, don’t hesitate to reach out to one of our Desjardins advisors. We want to help you reach your goals while you’re in Canada!
*Certain terms and conditions apply.
1. To learn more about the terms, conditions and details that apply to TFSAs, visit the CRA website
2. To learn more about the terms, conditions and details that apply to RRSPs, visit the CRA website
3. To learn more about the terms, conditions and details that apply to FHSA, visit the First Home Savings page on Canada.ca
4. To learn more about the terms, conditions and details that apply to RESPs, visit the Registered Education Savings Plan (RESP) page on Canada.ca