Where to best park your extra money – setting up financial goals for a bright future

In the first article of our series, we explained how getting rid of debt and creating an emergency fund was a good first step to build a strong financial basis. Now that you have a strategy in place to save money, you need to decide how you’ll invest your savings.

Whether you have a short-term, mid-term or long-term plan or goal, saving is good. And, a disciplined approach to saving money is even better. ‘Pay yourself first’ – aren’t you worth it? – is a personal finance strategy for getting you to that ‘savings’ finish line. A good strategy is to set aside a certain amount of money ($ or %) from each pay and then pay your monthly and discretionary expenses from the remaining balance. And, as your income rises, save more!

Investment considerations

When deciding how you’ll invest your savings, here are some important matters to consider at the outset:

1. What are your savings goals?

2. What is your time horizon?

3. What is your appetite for risk?

Your savings goals

Your savings goals may be "short" term in nature (say one to three years), such as saving for a vacation, buying an e-bike or a piece of furniture.

Your goals may be to save to buy a home or save for your children’s education, for example, so somewhat mid-term (say 5 to 15 years) or long term (more than 15 years) in nature. Here are some examples: 

Is buying a home your goal?

You have several options to consider, including a few tax efficient strategies. Firstly, you can set aside money in a savings or investment account. Second, you can contribute to your Registered Retirement Savings Plan (RRSP) and benefit from the Home Buyers' Plan (HBP)¹, which we'll speak more to that in the following paragraph and, third, you can set up a tax-free First Home Savings Account (FHSA), which we'll speak to, as well. 

First, the HBP allows you to withdraw from your RRSP to buy or build a qualifying home for yourself or for a related person with a disability’.² Up to $60,000³ can be withdrawn to buy a qualifying home, but keep in mind that there is a requirement under the HBP to repay⁴ the amount withdrawn over a 15-year period back to your RRSP. Otherwise, that amount that you were obligated to repay that year gets added to your income for tax purposes. The start of the 15-year repayment period can be delayed by 5 years total if you make your first withdrawal between 2026 and 2028 (repayments start in year 5).

In addition, with the FHSA, first-time home buyers can, potentially, save up to $40,000, subject to an annual $8,000 contribution limit over a 15-year period, along with the possibility to move $40,000 to an RRSP or RRIF if a home isn’t purchased. And, amounts withdrawn for a qualifying home purchase won't be subject to tax as long as a qualifying home is purchased. 

Is education your goal?

If returning to school is in your future, your time horizon is likely short to medium term and certain investing principles would be worthy of consideration, which we'll discuss later. However, another option may also be available to you if you have been contributing to an RRSP. The Lifelong Learning Plan (LLP) allows you to withdraw up to a maximum of $10,000 per calendar year, up to a total of $20,000 over four years, from your RRSPs to finance full-time training or education for you or your spouse or common-law partner.⁵ Similar to the HBP, there is a requirement under the LLP to repay your RRSP³, however the repayment must be made over a maximum of 10 years.

Is saving for your children’s education your goal?

If saving for your children’s education is top of mind, your money can be contributed to a Registered Education Savings Plan (RESP). To open an RESP account, your child must have a social insurance number; easily attained from Service Canada. 

The maximum amount that can be contributed is $50,000 per beneficiary and, as a minimum, the Federal government will contribute 20% (the Canada Education Savings Grant⁶) up to $2,500 contributed for each RESP beneficiary in a calendar year, up to a lifetime maximum limit of $7,200⁷for each beneficiary. Families of modest income may, also, benefit from the Canada Learning Bond when contributing to an RESP for children born in 2004 or later. And, additional incentives are provided by some provinces when contributions are made to an RESP.

Is retirement your goal?

With extra money in hand, you may think about providing some financial help to loved ones, perhaps an adult child. While such a gesture is generous and it would be nice to lend a hand, picture your future self. Make certain that you aren’t putting yourself in a position where you may not be able to meet your future needs, keeping in mind that we tend to underestimate how long we will live.

If nearing (say three to five years away) or in retirement, you have three options:

• RRSP contribution, assuming you have available RRSP contribution room, and you aren’t older than 71, unless your spouse or common-law partner is 71 or younger

• TFSA contribution, assuming you have available TFSA contribution room

• Non-registered investment

A further thought regarding that RRSP contribution. Making that contribution today may result in your Old Age Security (OAS) getting clawed back in the future. Consider whether getting that tax deduction, today, might be at the expense of a future benefit (e.g., OAS clawback). Speak with a qualified tax advisor to explore how to best proceed.

Your time horizon

We spoke about your time horizon, above, but your time horizon may be different than what was outlined and there are other factors to consider.

There are many different investment options available for you to invest in, for example, guaranteed investment certificates (GICs), mutual funds, segregated fund contracts, stocks and bonds. And, each of these products and their underlying investments have different risk profiles.

When your time horizon is shorter term in nature, it’s important to appreciate that the type of investment you choose may change in value throughout this period. Some may remain the same, while others may increase or decrease in value depending upon various economic factors. The same can apply when you are investing for a longer term.

When your time horizon is for a shorter term, consider investing in products that have a lower risk of decline in value, such as:

• a GIC;

• an insurance GIC;

• money market mutual fund; or

• money market exchange traded fund.

Your appetite for risk

Irrespective of your time horizon, it’s important to think about your appetite for risk. To achieve your goals, you need to consider the type of account you will hold your investments in, according to your risk appetite. You have two account categories to consider:

1. Non-registered, and

2. Registered.

A non-registered account is an account that, generally, has no restrictions, such as when you can make withdrawals from the account. The only limitation that you have may be associated with the investment you hold. For example, a GIC is invested for a term. So your money can’t be accessed until the end of the term. Also, income earned within a non-registered account will be taxed when received or earned.

There are numerous registered accounts. The more common ones that you may choose to open are the following:

• Tax-Free Savings Account (TFSA)

• Registered Retirement Savings Accounts (RRSP)

• Registered Education Savings Plan (RESP)

• Registered Disability Savings Plan (RDSP)

The benefits of a TFSA

The TFSA is available to Canadian residents who have a valid social insurance number (SIN) and have attained the age of 18 (age of 19 in some jurisdictions). It began in 2009. The TFSA is an interesting option if you want your money to be invested for the near term if you have available contribution room. The income earned in a TFSA isn’t subject to tax, in most cases. No matter your age or risk appetite, the TFSA might be the perfect investment vehicle for you.

Other avenues to benefit from

While we may think that age and stage of life fall hand-in-hand with each other, we can’t limit ourselves to such stereotypical thinking.

Young adults have the same competing interests for their earned dollars as their parents had. However, the competing interests have gathered heightened attention because of a few key factors:

• The high cost of housing, making the dream of owning a home, thought to be less attainable, and

• A move by employers away from defined benefit pension plans (DBPP) to defined contribution pension plans (DCPP), thereby shifting the responsibility for a secure pension in retirement from the employer to the employee.

Although, young adults, are likely not dreaming of their retirement, it’s well known that individuals benefit from saving early, saving often and staying invested. 

If an employer’s benefit package may include a DBPP, DCPP or group retirement saving plans (Group RSP) with or without a matching program, participation in these plans should be strongly considered. Join! Not only does this get you saving, it may provide an opportunity to accelerate savings towards retirement (remember your employer may also be contributing), and, such savings can be tapped into when buying a home, for example. 

For the adult who may no longer consider themselves young and either nearing retirement or in retirement, having some extra money can go a long way towards, paying off debt, even ‘good debt’, because debt in retirement leaves you exposed to potential future interest rate increases. An interest rate increase, when living on a fixed income may leave you making choices to cut back on spending in other areas of your life.

¹Certain conditions must be met in order to be eligible to participate in the HBP

²Government of Canada, What is the Home Buyers’ Plan (HBP), https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan.html

³Government of Canada, https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan/participate-home-buyers-plan.html

⁴Government of Canada, https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan/repay-funds-withdrawn-rrsp-s-under-home-buyers-plan.html

⁵Government of Canada, Participating in the LLP, https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/lifelong-learning-plan.html

⁶The Canada education savings grant is paid until the the end of the calendar year in which the child turns 17 years of age. 

⁷Government of Canada, Registered Education Savings Plans (RESPs), https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4092/registered-education-savings-plans-resps.html#Gov_grants

Information contained in this article is provided for information purposes only. It’s not intended to provide or be a substitute for professional, financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard. It also does not constitute a specific offer to buy and/or sell securities. You should always consult your financial advisor or tax specialist before undertaking any of the strategies discussed in this article to ensure that all elements and your personal circumstances are taken into consideration in developing your individual financial plan. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of the strategies discussed.