Everyone has their own style or method to save. You can use your own style to save. If you are looking for one, a proven method of saving is, pay yourself first. Every time you earn some money, you would normally pay out different bills like electricity, credit card, rent and so on. Before you start preparing a cheque for all these bills, give yourself a cheque of savings or instruct your bank to transfer a fixed sum every month into a mutual fund or a GIC. This is called paying yourself before everyone else. Once you have paid yourself, you can use the rest of your earning into paying the rest of the bills. This way, you have a steady flow of savings built up. You might notice that as your income increases, your expenses also increase. So, developing a habit of paying yourself first helps when you don't have any other method of savings. Another method is to prepare a weekly or monthly or an annual budget. You allocate your income to different expenses. Bring down some expenses by taking necessary actions and work on increasing your income from different sources.
What you do with your savings depends on factors like 1) what you want to achieve, 2) what is the time horizon for your goal, 3) how much is your knowledge about different investment vehicles, and so on. An investment vehicle helps you to go from current financial position to next financial position. For example,
Start : $1,000 Travel time : 1 Year Vehicle : GIC 2% Destination : $1,020 (calculated)
As your financial understanding develops, you can choose one or more investment vehicles. They help you achieve different goals. Following are a few vehicles you might look into and then evaluate what makes you comfortable and go from there. Periodically, you might want to look at the savings and decide if you want to reallocate your finances in different vehicles. There are three major paths of directing your savings in Canada viz., RRSP, RESP and personal savings. RRSP takes care of savings needed for retirement. RESP takes care of savings needed for children's education. Personal savings takes care of other goals.
Registered Retirement Savings Plan: As the name suggests, it is a plan to save for your retirement. When you invest in RRSP, you get a statement from the institution as to what is your contribution and what is the current balance of RRSP. This notification serve as your record of what is going on with your RRSP money. A good time to investing in RRSP is after you get your first assessment notice from Canada Revenue Agency (CRA). You can open one or many RRSP accounts with any of banks, insurance companies and financial services companies. More RRSP accounts involves more management. The maximum amount that you can put under the plan is determined on the basis of your last year's earned income. CRA informs you in the assessment of your income as to how much you can put in RRSP. It is 18% of your last year's earned income. For example, if you earned $10,000 in 2005. You can put $1,800 in RRSP during 2006. The quick advantage of saving under RRSP is, you can reduce the income tax payable for the year. You can save this money in different investment vehicles like GIC, Mutual Fund, Stocks, Managed Portfolio Services, Real Estate and many more items. You can calculate a round about number for RRSP for 2005 and instruct bank to transfer a fixed sum to your RRSP account every month in 2006. It is a good idea to check with your tax consultant while you implement this method.
When you invest in RRSP, you reduce taxable income for the current year and that way you are postponing the income tax. When you withdraw amount from RRSP, you pay the tax on withdrawn amount. So, your money gets tax sheltered growth in RRSP. You must discontinue RRSP, the year you turn 69 years old, and transfer RRSP money into other plans or transfer tax free into an RRIF (Registered Retirement Income Fund). You may also choose to retire at anytime before you are 69 years old. At that time, money in (premature) RRSP can be transferred tax free to RRIF [as per paragraph 146(16)(a)], which allows structured withdrawal of amount from RRSP. It is a good idea to start RRSP at an early age to get maximum benefit. Who knows, you might choose to retire early!
There are several books on RRSP which explain the concept and the application in detail. Self Directed RRSPs by Shirley E. Woods, Million Dollar Strategy by Michael Decter, RRSP Answer book by Gail Vaz-OxLade and Garth Turner's RRSP Guide and would help you to understand RRSP in more depth.
Registered Education Savings Plan: As the name suggests, it is a plan to save for your children's education. Similar to RRSP, you get statement for RESP, when you participate. That statement serve as record of activities in RESP. The education in public school is free up to grade 12. This means, if you save some money towards education while the child is growing, you can utilize that savings for higher education. When a child goes for higher education after grade 12, the money saved under this plan can be utilized towards education costs. The income generated by the amount invested in this plan is taxed at the time of withdrawal. It is considered as income for the child and taxed accordingly. For example, you saved CAD 2,000 in RESP. By the time your child finished school, this deposit earned an income of CAD 1,000. When you withdraw this money, your child is said to have an income of CAD 1,000 for that year. Your child has to pay an income tax on CAD 1,000, which is zero dollar. It is a good idea to check with your bank what investment products they offer for RESP, while shopping around for investment in RESP. There are also institutions that specializes in managing RESP savings.
Canada Education Savings Grant (CESG) is another benefit of savings under RESP. There are several rules and restrictions for CESG. However, on an average you get 20% of amount you deposit in RESP as CESG. You can save RESP money in any of different vehicles of investments. You can instruct your bank to transfer a fixed amount of money every month towards RESP. That way, you can continue to follow the savings method of pay yourself first. If your children don't go for higher education, RESP amount can be merged with one's RRSP after returning the grant money to the Government.
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GIC: Guaranteed Income Certificates are the easiest choice to start with. When you buy a GIC, you get a bank statement listing down the GIC with them and at the end of the year, you get a statement as to how much interest you earned on the GIC. This serves as your record of the activities in GIC. GICs can act is intermediary investments while you build a bigger amount for assets like a car, a house or a business. Different banks offer GICs with different deposits and withdrawal options. The term or duration of deposit in a GIC can range from 1 month to five years or more. You get different rates of interests depending on the term or duration of the deposit, the amount of the deposit and the scheme of the deposit. The interest rate posted is for a year. If the deposit is for a shorter term of the year, the interest is calculated for the fraction of the year. One can employ many of several strategies with GIC, which adds flexibility to your GIC savings. One of them is staggered GIC. For example, you have 10,000 in GIC. You put 2,000 each year in GIC for 5 years. This way, you earn the best rate of GIC and you have 2,000 available each year for withdrawal. Some GIC offer increasing rates of interest every year. So, if you have not withdrawn money for longer, you get better interest rates. You might put 1,000 each month in this GIC. This way, you have 1,000 available each month as anniversary withdrawal. If you do not withdraw, you earn better rate of interest. Then there are savings account that pay you good interest as long as you keep balance above CAD 20,000. You may find the current interest rate offered by a bank on their websites. For your reference, the links are provided on the right hand side. |
Bonds: Bonds earn interest at a fixed rate, just like GIC. The difference is you can sell off bonds anytime you want, so your money is not locked for a specific period as in GIC. However, price of bonds change as per the market swings. So, there is a possibility that you might lose money when you buy a bond at a higher price and sell at a lower price without even earning an interest. You might want to know little more about it before venturing into bonds. Your banker might be a good person to explain different options you can have with bonds. You may buy also bonds as your RRSP investment.
Mutual Funds: Different financial companies offer different kinds of mutual funds. You can buy a mutual fund from the bank, where you do your banking. One can buy mutual fund through mutual fund a sales representative. They usually keep in touch with their existing clients for more leads. You might find advertisements of mutual fund companies in the newspapers or finance related magazines. You might want to check with your bank, what kind of mutual funds they offer. One limitation you have to remember is, you will not be able to withdraw money from Mutual Fund for at least 90 days. If you withdraw, you might attract a charge of 2% for early withdrawal. However, you will be able to withdraw your funds fully or partially anytime after 90 days (3 months). The bank representative fills out a form that evaluates your investor profile and then suggests a fund that suits the profile. Once your account is opened and initial investment is done, you might start learning more about this subject. You can hold more than one mutual fund under an account. You can also buy mutual fund as your RESP, RRSP and RRIF investment.
Shares and Debentures: You might want to involve a financial advisor and/or a full service broker here. If you want to do it by yourself, there are discount brokerage services offered by banks and brokers. Canadian Securities Institute has published a book, "How to invest in Canadian Securities" ISBN 1-894289-56-0. This is a very good source of learning about investing in shares and mutual fund. You can also look up into the links mentioned above in the box. When you buy shares, you get a statement from you broker as to how many shares have been bought and at what rate. This document and other statements serve as record of your activities in buying or selling shares.
Income Trusts: Income trusts is another method of investing in a company. The income trust distributes income on monthly basis to the unit holders without deduction of taxes. There are REIT (Real Estate Income Trust) and other income trust that distributes income on monthly basis. They provide a steady source of income on monthly basis. They also return a portion of investments on a regular basis. That way, your investment reduces. Then there is a risk of unlimited liability while investing in an income trust. Ontario has declared limited liability on Income Trusts since October 2004. You might want to improve your understanding about this investment before taking a plunge in it.
Home: Buying your home is another way to utilize your savings. You might need some advise from your realtor as to how you go about buying a house. They will help you in identifying the home and may be point to direction as to how to arrange for finance. Ontario Home Ownership Savings Plan and RRSP also provides a source of funds for buying your house. A financial advisor would be a great help in this kind of sourcing of funds. You can use your home to generate rental income and/or you can sell your home at a higher price to generate a capital gain. Recently there have been a rise in the frauds in home selling. A person who does not own a house might sell you a house fraudulantly presenting it as his/her own. Title insurance is one way to protect this biggest investment of your life. Buyers have to beware while buying a home.
Business: The ultimate of investing. Ideally, this needs planning, evaluation and preparation. Having said that, there are also people who start a business without any apparent plan. It can also happen as events taking such a turn that a person is in business as a response to situations. Business Development Bank of Canada and Govt. of Canada provide important guidelines on how to go about starting and running a business in Canada. There are three usual ways to start a business - 1) start from ground up or 2) buy a business outright and 3) join a franchise. You might find advertisements for selling a business or starting a franchise in the newspapers and magazines including the free publications in yellow boxes. These ads can be the raw material for brainstorming as to what business to start. Many people starting business for the first time find franchising or buying a running business more comfortable than starting from ground up. One might find that the person selling the business provides business loan too. Franchising usually involves a training period before you start. If you are planning to buy a business, a thumb rule can be evaluating how you as a new owner can improve profitability of this business.
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