Don’t know your RRSP from your TFSA? Neither do a lot of people. Thank heavens for financial whiz Shannon Lee Simmons. The sassy, Toronto-based powerhouse runs her own fee-based financial planning company called The New School of Finance. I heard her speak at a women’s tech conference where she held dozens of women in rapt attention while explaining high risk vs. low risk tolerance. There was swearing involved, and I learned that anyone who likens a bond to an LBD is my kind of gal. A whole lot of Shannon’s clients are under 30 and finding their financial footing. Here’s what I asked her (so you don’t have to):
Everyone says I should be saving money. How much? (Oh, and did I mention I barely have any?)
If you have numbers in your head that you’re supposed to be hitting, it can be overwhelming. You could start with 5% of your take home income. Life is expensive, and if you’re saving anything – you should be proud of yourself. Even $50 a month is better than nothing.
Where should I put my money so I don’t blow it all at H&M?
First of all, decide if your savings will be used to pay down student debt, or will be an emergency fund. It should go into a separate account from your day-to-day one. The oldest trick in the book is to automate it like a bill, so you forget about it. Put it in a safe place like a tax sheltered TFSA account.
What the f*&ck is a TFSA anyway?
A TFSA is a savings account where you can put money for the short or long term. Any interest that you earn on this account is tax free, meaning more money in your pocket and less to the taxman. But don’t deposit more than the maximum allowed or you’ll pay a penalty. If you want to know what your maximum is, look at your most recent tax return or your CRA My Account profile (everyone should get one of these).
Does it matter where I open this TFSA?
If you want the money to be safe and liquid, hunt for the best rate of interest. Go to websites like RateHub or RateSupermarket and you’ll see who’s offering higher interest rates, then compare them to the one your own bank is offering. Online banks like Tangerine tend to offer higher-interest because they don’t have the bricks and mortar overhead of a bank.
I don’t make a ton and retirement feels like a zillion years away. Do I really need an RRSP right now?
The income you earn in an RRSP is tax-free, but it has the added bonus of a tax refund because it reduces what you owe the government come tax time. However, the more money you make, the better this refund is so it might be something you take advantage of down the road when you’re making more money and not just starting out. If you’re 22, you still have 40 years to invest. At this point in your life, you may want to be paying off debt instead. There’s an emotional anxiety that comes with debt. Deal with this first, then build an emergency fund, and after that, move on to an RRSP. The one caveat to an RRSP is that if you take it out early, you must pay back the tax credit that you originally got on that money . It’s called retirement savings for a reason! That money should be for retirement, a down-payment on a house or full time school, but it it’s not for these, keep it elsewhere like in a TFSA.
I read somewhere that I need three months of savings in the bank at all times. WTF? I can barely afford cat food.
I have never put so much emphasis as I do now on having an emergency account. It’s a sign of the times! Obviously it would be great if we could have three months of savings, drink eight glasses of water, and do 30-minutes of exercise a day, but it can be hard to get there. At the very least, make sure you can pay your bills for two months, including rent and cell phone. If you’re lucky enough to have an employed position and you get laid-off, you’ll get EI but that can take 6-8 weeks to come through. Aiming for three months is healthy, it may take a year or two or three until you have it built up, but it’s a level of financial security that will help you to sleep at night, especially in this unpredictable economy.
I just got my first real job. Can’t I just enjoy being a baller for a while?
Yes! Take your first month and don’t do anything, get a new wardrobe, celebrate. Life is too short to always do the fiscally responsible thing. You earned it, congratulations! Just don’t sign on for an apartment that you can’t afford or get a car that has a payment you can’t keep up with every month.
Should I be investing in the stock market?
If you’re debt free and you have 3 months of emergency savings tucked away, you can start looking at investing in a TFSA or your RRSP but until then no. Every dollar counts and there should be no risk tolerance until you are debt free and have an emergency fund saved up.
Is buying really better than renting?
Buying a house or condo that you can afford can be better than renting forever but the key is that it’s affordable. Renting is smarter than buying if you’re putting yourself in a situation that makes you condo or house-poor. Rent can be the same as a mortgage payment but don’t forget about condo fees and property tax. There’s so much more that goes into a property than just the mortgage. The best way to prepare your finances so that you can afford something down the road is to pay down debt. Where people screw up as renters is by taking on something they can’t afford. Get a roommate, rent within your means. Then, you can save more money.
Any final words of wisdom? I need all the help I can get.
Don’t get frustrated, don’t give up and don’t lose hope! Whether you’re saving towards paying off debts, an emergency account or towards medium and long term goals, a little bit goes a long way and time is on your side. Just do it! Give yourself time and you’ll definitely reap the benefits.