Welcome back to the Her Campus McGill finance blog! This week, I’m going to talk about savings.
Why Should You Save?
In a perfect world, everything would go according to plan all the time. Unfortunately, we do not live in a perfect world and from time to time, emergencies happen. Say however, that you get lucky and never have an emergency—are you counting on always having enough money on hand to buy whatever you’d like? When you reach retirement, will you have enough money to eat? Saving now, rather than later, will help you to develop answers to these questions.
In Canada, more than half of Canadians live paycheque to paycheque. This means that they are spending 100% of their income and, in the case of a job loss, a car failure, or a medical emergency (hell, even a fancy haircut) those people would have to go into debt until their next paycheque. A system of paycheque to paycheque living is risky and stressful, but they are ways to avoid or mitigate it through saving.
Even though retirement is a long way away, you must start saving for it now. The government has implemented many programs over the years to help you save for retirement (both with and without tax deductions). The two most popular forms of retirement savings are Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).
Three weeks ago, I made a strong case for you to get started on a budget. If you have done so, great! If not, get cracking! There are two ways to incorporate savings into your budget—through the pay yourself first method and through the save what’s leftover method.
Pay Yourself First
In this method, you will, before paying bills, before buying new clothes, take at least 10% of your pay amount and put it into a savings account.
Save What’s Leftover
In this method, after paying your bills, you take a percentage of the remainder of your income and save it. Again, you must save a certain amount before you spend on other things—otherwise you won’t have anything left with which to build your savings.
These two methods are a way to instil routine and discipline. The Pay Yourself First method is the easier of the two because you aren’t tempted to spend that money—if you earn $500 per month, you know that you really only have $450 because you must save $50 (10%). Because this method makes it easier to keep track of funds and debt, and keep a steady saving routine, it works better than the aforementioned alternative.
How Much Should You Save?
10% of your income is the minimum. Experts recommend that you save six months of basic living expenses in an emergency fund that is easily accessible in case you need it. Once you have your emergency fund (short term savings) established, you should direct 10% savings to retirement. Anything else that you wish to save up for should be separate from the amount that you save for retirement. Any amount that you divert from your RRSPs now may cost you dearly in the future.
Alternative Way to Save
In some workplaces, you can ask your employer to set aside a certain amount of your paycheque in a separate bank account. However, I would not recommend doing this practice with any employer. If you do choose this option, make sure that your boss understands that this is your money and make sure that he/she is honest and trustworthy.
Most banks offer a “round-up” program. Basically, each time that you use your debit card, the amount is rounded up to the nearest $1 and deposited into a separate savings account. Without you even needing to do anything, you will be saving!
A third way to “save without saving” is to over-pay your bills. If your Hydro bill is $100 and you can afford to pay $125, pay $125! When your next bill comes in, the extra $25 will be credited and you will only have to pay $75! This allows you to plan and pay ahead for months when you may have extra expenses.