How much should you save for an emergency fund?
Whatever your age, the first sign that your savings are in good health is the state of your emergency fund – if you have one, that is. Ideally, this should be your first savings goal.
To know how much to set aside for an emergency fund, calculate an amount equivalent to three to six months’ expenses. If you’ve already made a monthly budget, this amount will be easy to determine.
Your emergency fund should be kept in an easily accessible account or investments in the event that you, for example, suddenly lose your job or encounter an unexpected expense. You could opt for a High Interest Savings Account (HISA) or a Tax-Free Savings Account (TFSA), though the latter has a contribution limit. You could also put your money into easily accessible investments. Fixed-term investments and guaranteed investment certificates (GICs) should be avoided.
How much should you save if you have children?
How much should you contribute to an RESP?
If you have children, one of the first questions to ask yourself is: Are you saving enough to take full advantage of government incentives and subsidies?
Keep in mind that to get the most out of an RESP, you need to deposit $2,500 per child annually. To learn more about RESPs, read our article.
How to review your savings strategy
In addition to the cost of education, children come with many other expenses. This means your overall savings may have dropped, especially if your income was lower during parental leave. If this is the case, you’ll need to review your savings strategy.
It may be to your advantage to reduce your RRSP contributions in order to contribute to your child’s RESP. It’s preferable to reduce RRSP contributions when your income is lower, such as during parental leave. You’ll be able to use your contribution room (which will be carried forward) when your income returns to normal. That way, you’ll enjoy the full benefits of an RESP and the tax deductions of an RRSP once your income is higher.
Tip: If your budget is tighter after your child’s arrival, TFSA contributions may be a better option for you. Unlike an RRSP, your TFSA savings remain accessible without tax penalties should you need to make a withdrawal.
How much should you save at the beginning and end of your career?
How much to set aside at the start of your career
When you enter the workforce, retirement seems like a distant thought. But setting up good saving habits early in your career is likely to pay off later, whether your employer offers a pension plan or not.
Here are two tips for optimizing your savings:
- Maximize your benefits. If your employer offers programs such as RRSP contributions or a stock purchase plan based on your level of contribution, you should make the most of them. For example, if they match 25% of your contribution, up to a certain amount, in a company stock purchase plan, make sure you reach the maximum amount. This is the type of savings worth prioritizing because it allows you to essentially increase your salary.
- Try to save as much in taxes as possible. Ideally, as soon as your salary is high enough to pay taxes, you should contribute as much as possible to your RRSP to take advantage of tax deductions. You can invest up to 18% of your annual salary in an RRSP.
Are you self-employed? Since your income tax isn’t deducted automatically (i.e., directly from your paycheque), it’s a good idea to set some money aside so you can pay your taxes on a quarterly or annual basis. To find out how much to set aside if you’re self-employed, read our article.
How much to set aside for retirement
The answer to this question isn’t universal and can vary depending on a number of factors. To know how much to save for your retirement, you need to draw up a personalized plan based on, among other things, your projects, debts and whether you have a pension plan.
That said, here’s a breakdown of average savings by age. You can use this to assess whether you need to catch up on your retirement savings:
- At age 35, you should have saved the equivalent of your annual income
- At age 40, 2.1 times your annual income
- At age 50, 4.6 times your annual income
- At age 60, 8.5 times your annual income
- At 65, retirement age, 11.3 times your annual income
Note that these figures are based on someone who started saving 18% of their salary at age 30, has a balanced investor profile and plans to retire at age 65.
How much should you save for your first property?
If you’re thinking of buying your first property, the first step is making a down payment. This represents a minimum of 5% to 20%, in some cases, of the property’s value. Then there’s a long list of costs to consider at the time of purchase, which generally represent 2% to 3% of the property’s value. You’ll also need to take into account new property taxes and the cost of any major renovations.
To get a better idea of these costs, read our article and discover 9 fees to consider when buying a home.
How much should you save for a major project?
Saving for a major project, such as a trip or a car, is a process in itself. You should have specific savings plans for each of your projects that respect your personal budget.
The amount you put aside should reflect this plan and the timeframe in which you wish to achieve your goal. If you fall behind schedule, consider extending the project’s deadline.
The rest of your savings, such as your emergency fund or retirement savings, shouldn’t be used for these special projects. Pursuing them shouldn’t affect your savings for the more essential parts of your life.
Tip: Anticipate higher project costs to ensure you have enough savings to be comfortable once the project is complete.
Should you pay off your debts or start saving?
If you have debt, it’s not the end of the world. And it doesn’t mean you have to stop saving – you can save while paying it off. However, you need to put a good repayment strategy in place that’s based on your situation and needs. Evaluate your options, make a plan and don’t hesitate to seek help from specialists.
Should you dip into your emergency fund?
As the name suggests, an emergency fund should only be used for an emergency. That said, it’s a good option in the event of any unforeseen circumstance, major or otherwise. Generally speaking, you should use it rather than go into debt.
If you do use it, set up a repayment plan to replenish it over a reasonable period of time, always staying within your budget. This could mean cutting out non-essential expenses and postponing certain projects.
Should you take money out of your registered accounts, and if so, which ones?
Money placed in registered savings accounts is often tax-sheltered and has probably earned you tax deductions. This makes them a valuable asset that should be handled with care.
If you plan to use savings deposited in registered accounts, ask yourself these questions first:
- Are withdrawals taxable? You should prioritize tax-free withdrawals, as is the case with a TFSA, especially during years when your income is high. Withdrawals from an RRSP or FHSA will be taxable, except in certain cases, such as the purchase of a first home or a return to school.
- In what type(s) of investments is your money invested? If your money is invested in stocks, for example, you need to do your homework and assess whether it’s a good time to sell them and withdraw your money. You could lose money if their value on the stock market has dropped. Also, if your money is invested in fixed-term investments, such as redeemable GICs, you could pay a penalty by withdrawing them before maturity. Make sure you understand how your money is invested and assess the potential for loss.
Should you adjust your savings or your spending?
A debt, large unforeseen expense or budget deficit will often force you to review your budget and lifestyle.
If you’re looking for things to cut in your budget, savings should not be your first choice. Non-essential expenses, such as eating out, should ideally go first.
If you decide that reducing your savings is right for you, do it strategically. Savings that offer tax deductions, such as RRSP contributions, should be maintained. That way, you might be able to use a tax refund to pay down debt or balance a budget deficit. You could also reduce savings for projects that can be postponed to a later date, such as a trip.
Do you need a financing solution?
This option requires careful consideration. You need to weigh the interest rate you’ll pay on a loan against the return you’ll earn on your investments. If the interest you have to pay is greater than the gains you’re making on your investments, it may make more sense to withdraw part of your savings. Do the math and see which option keeps the most money in your pocket.
That said, using a lower-interest financing solution, such as a line of credit or personal loan, should definitely be prioritized over not paying off your credit card balance. Interest on credit cards is generally higher.
Tip: If you have a mortgage, ask your bank if you’re eligible for a home equity line of credit, which is another borrowing solution with generally lower interest rates.
At the end of the day, saving isn’t an exact science, but there are some basic rules to help you stay on track. Systematic savings, which are automatic transfers of small (or larger) amounts into a savings account, are a good way to put money aside consistently without even thinking about it. Keep in mind that there’s no such thing as too little or too much.
Would you like to discuss this with us? Contact your National Bank advisor or your wealth advisor at National Bank Financial. Don't have an advisor?
