Money, money, money… Are you cringing yet?

In some homes it’s considered rude to talk about money. And, perhaps, that’s why we’re in the state we’re in. To some of us, the mere mention of “savings” conjures up cold sweats and waves of panic. We all know that we should be saving more, but very few of us are. Why is that? Are we so disconnected from our finances that we don’t know how they work anymore?

Well it’s time to reconnect with our money instead of avoiding it like the plague.

The first step?  Here’s a beginners guide to choosing the right savings account for you.

Step One: Release the fear.

The first step to choosing the right account is letting go of fear and talking openly about money.  What are your financial goals? What are you saving for? Your child’s education, the down payment on your first house, a new car, or a holiday in the sun?

How much money do you have to put towards savings? This might not be an easy question, but it’s an important one.  Depending on how much money you can afford to put away, some types of accounts are better than others. While smaller sums are good for high interest savings accounts and tax-free savings account, you usually need to be able to sacrifice larger sums to make stocks and bonds worthwhile.

Write down your savings goal for 3 months, 6 months, 9 months, 1 year, 3 years and 5 years.  By making shorter more frequent goals you’re more likely to stick to your plan and stay on track with your savings.

Step Two: Do your research.

The second step to choosing the right savings account is to carefully consider
all of your options and research the details associated with each product.

Minimum balance required

Some savings accounts require that you always keep a minimum balance. If you’re the kind of person who wants access to your money, this requirement may be a hindrance.

Accessibility

While some accounts allow you unlimited access to your money, you usually have to pay a price for that service. If having access to your money isn’t important, then you might want to consider an account that doesn’t charge monthly fees.

The return on your investment

Interest rates vary, depending on the type of account and the service you want. Basic savings accounts that offer very little services offer higher interest rates, while other accounts charge fees for those services and offer lower interest rates. If your money is locked in for longer, the interest rate is likely to be higher.  Really think about your needs; the fewer your demands, the more money you could make in interest.

The fees

Most banks charge nominal fees for their services, however, they do offer accounts that charge no fees – provided you leave your money alone. Be sure to ask about fees and what you are paying for.

The risk

Not all savings plans work for everyone. Some are riskier than others. To assess your risk tolerance level, read the article How to assess your risk tolerance.

It’s true; knowledge can be both powerful and profitable, but to get that knowledge you can’t be afraid to talk about money. The first step toward financial freedom is really that easy. Take a deep breath, shake off your fears and make money an open and easy discussion.

Not all savings accounts are created equal. Some offer you unlimited access to your money in exchange for a monthly fee, while others charge you nothing provided you leave your money where you put it. The type of account you choose really depends on you. Consider:

• Your overall financial goals
• How much money you can deposit
• How long you can go without withdrawing money

The Different Options

Savings account

This account allows you the most flexibility, but offers the lowest interest rates. The benefit of using this type of account is that you can access your money at any time.

High interest savings account (HISA)

Usually, a high interest savings account will offer you a higher interest rate than a traditional account will. Some require that you keep a minimum amount of money in the account, while limiting the number of free transactions you can make.

Tax-free savings account (TFSA)

As a registered savings vehicle, a tax-free savings account allows you to invest up to $5000 per calendar year without having to pay income tax on the interest you earn when you make a withdrawal.

Registered retired savings plan (RRSP)

To motivate Canadians to set aside money for retirement, the government offers tax deductions on contributions made to your RRSPs. When tax time comes, your taxable income is reduced by the amount that you had contributed. Keep in mind that the government will tax you when you withdraw this money, however you will likely be in a low income tax bracket as a newly retired 60-something year old.

Registered Education Savings Plan (RESP)

If you’re saving for your child’s education, you may want to consider using an RESP, rather than a traditional savings account. The government offers additional benefits when you deposit money into an RESP such as the Canada Education Savings Grant (CESG or the Canada Learning Bond (CLB) – both options are free money.

Youth Savings Account

Start your child’s savings off young and they’ll likely have a better grasp on their finances as they grow up. Many financial institutions offer accounts without transaction fees and other fun incentives.

Bonds

Bonds are loans, but unlike other loans, you’re the lender, since you’re the one purchasing the bond. The issuer of the bond, or borrower, is usually a big company or the government. They borrow your money in order to lend it to other companies or to use it as needed. The bond issuer pays periodic interest to you, the lender, and then returns the borrowed money at a set date in the future.

Equity

Pieces of a company are often referred to as equities, or stocks. There are two types of stocks: preferred and common shares. When you buy stocks, you are basically buying shares in a company, meaning that you are part owner of that company. When the company profits, the shareholders profit. Likewise, if the company suffers financial loss, so do you.

Mutual Funds

A mutual fund is a managed product that pools money from many different investors to purchase a portfolio of investments that can be made up of t-bills, stocks, bonds and/or equities. Mutual funds are definitely not for everyone as they are deemed to be a riskier investment, fluctuating in value depending on current market conditions, both at home and abroad.

Although they can seem a little scary to a new investor, there are a lot of advantages to purchasing a mutual fund. They are professionally managed, they provide you with diversification that would otherwise be very expensive to do on your own (mutual funds can hold anywhere between 50-100 different investments, you try buying all of those on your own!), they are cashable at any time and may provide you with some savings at tax time too.

There are some disadvantages as well, the professional management does come with a fee (sometimes transaction fees, management fees or loads), there is no insurance available for mutual funds and of course the obvious – fluctuate in value, meaning you can actually lose money on them.

If you are a fist timer, visit a branch and speak to a mutual fund representative to help you chose an appropriate fund specific to your risk tolerance.

Market Linked GICs

This is a happy medium between a GIC and a mutual fund. Just like a GIC, your principal is protected so no need to worry about losing money on this product. However, the return (or interest) that you will receive at the end of the term is to be determined.

The market growth GICs performance is “linked” to the performance of the underlying equity market/index that it is following. So for example, if you have a market linked GIC that is following the S&P/TSX index which increases by 8% over the term of your GIC, your return is 8%! However, if the index falls by 20% you do not lose 20%, your return is 0% and you are given your principal investment back.

A market linked GIC could be a great addition to your portfolio! To find out more, visit your branch and speak to a financial services representative.

No matter how much you’re setting aside, I guarantee you still don’t think it’s enough. And it probably isn’t – at least, not for your liking. Truth is if you thought you were on the right track, you wouldn’t be here. There is no set amount you should be putting away, but here’s a cool formula (based on your income after taxes) to get you started.

• Spend no more than 50% of your income on NEEDS

• Put 20% aside as SAVINGS

• Spend the remaining 30% on WANTS

Needs include housing, food, utilities, insurance and transportation costs. Wants include things like cable TV, entertainment costs, unnecessary clothing and toys, such as iPods and sporting equipment.

Now, you’re probably sitting there looking at your current budget and worrying that it doesn’t even closely resemble the one outlined here. Don’t worry about it. This is just a loose guideline to help you reshape and better balance your budget.  There’s no better time to start than today!

We all know that saving money is important, but not all of us know how and where to start. Since there are so many different savings options to choose from, you’ll want to compare some of the more common features of each first.

Before choosing your savings account:

1. Do your research. Different banks offer different products. In order to make your money work for you, you’ll want to choose the best option for you.

2. Budget. Make a plan – something both affordable and attainable – and follow it.

Here’s what you need to know about savings accounts:

Interest rates

Some institutions offer more bang for your buck than others. Virtual banks like ING Direct, PC Financial and Ally offer even higher rates than the average bank because they have fewer overhead costs.

Monthly fees

The best savings accounts will allow you to deposit and transfer funds online for free. Some will charge monthly fees for this privilege. Since the goal is to save money, you might want to choose a bank that takes your goal seriously and allows you to save fee-free.

Amount of Money

In order to qualify for their best interest rate, some banks require you to keep a minimum balance. If you plan on keeping a lot of money in your account, it’s in your best interest (pun intended) to negotiate a higher interest rate with your bank.

Service

Different banks offer different services – and usually, but not always, the features included are reflected in your interest rate. Some institutions operate strictly online, while others have tellers who can help you with your transactions. You’ll want to look closely at the services provided and decide if they fit your needs.

Features

Banks are offering more and more features to attract new clients. Some will allow you to track your spending. Some will offer incentives in the form of gift certificates or sign-up bonuses in exchange for your money.

An Interesting thing about Service Fees

If you had to pay a $2 toll every time you used the elevator at work, would you keep using it? Depending on how much time and energy you had, you might. But I’ll bet you’d take the stairs more often. Now what if there was an elevator just around the corner that allowed you to ride as often as you wanted – for free?

You’d have to be pretty thick to keep taking the first elevator, wouldn’t you?

Some savings accounts are like that first elevator – they take your money every single time you use them and they’re offering the exact same service as the next guy. So why is it that you wouldn’t be caught paying to take the elevator several times a day, yet you’d pay unnecessary fees on your savings account?

Types of Fees

Depending on the institution and the type of account, you may have to pay for the following services. Assess which ones you need, and which ones you don’t.

Monthly fee

Although this type of fee is slowly disappearing now that online banking
is an option, some banks charge a monthly fee just for the privilege of using their services.

Assisted transactions

Anything done in the bank or over the phone is considered an assisted transaction.

INTERAC transactions

Whenever you purchase something using debit or withdraw from your account using another bank’s ATM your bank will likely charge you a fee.

Email money transfers

Transferring money via email is becoming a popular feature, and most banks charge a nominal fee to do this.

International transactions

Any transaction made outside of the country. Be careful; you can incur heavy fees for doing this.

Account history

Sometimes just asking for additional information about your account can incur a fee.

Good for you! You’ve made the smart decision to open a new savings account. You have a budget and a plan. All you need to do is open the account, which is, no doubt, the easiest part of the journey. Once you make that first deposit, the exciting part is watching your money grow.

Most banks require 2 pieces of identification in order to open an account. One of those pieces must be photo ID.

• Passport
• Social Insurance Number
• IMM 1442 (Student Authorization, Employment Authorization, Visitor Record, Temporary Resident’s Permit)
• IMM 5292 (Confirmation of Permanent Residence)
• Health Card
• Birth Certificate
• Drivers License

TFSAs

Since they need to be registered, tax-free savings accounts must be opened in person. Why do they need to be registered? Because the money you make in interest is tax-free and the government wants to keep track of that. Currently, there’s a limit to how much money you can deposit each calendar year – $5000.

In order to get started all you need to do is fill out some forms and provide identification. You can ask your bank to make regular, fixed deposits, or you can retain complete control and deposit whatever you like, whenever you like.

RRSPs

Thinking about RRSPs? Good idea. Not only is it wise to save for the future, the money you invest also provides you with tax savings.  Similar to a tax-free savings account, an RRSP, or registered retirement saving plan, is a registered program through the government. What you invest now helps to offset your taxable income, but you will be taxed later when you withdraw the money.  The idea is that you are likely in a higher income tax bracket now than you will be later in life when you withdrawal from your RRSP (in retirement), therefore your income is ultimately taxed at a lower rate.

A financial institution can help you choose a plan that works well for you. You have many options to choose between, such as a balanced fund or a more aggressive plan. Visit your financial institution for more information and always work with a financial representative that you trust.

GICs

One of the easiest and safest ways to save your money, both long term and short term, is through GICs, or guaranteed investment certificates. Often GICs offer higher interest rates than traditional savings accounts and, since your interest and principal are guaranteed, they are secure investments.

GICs can be saved for any set amount of time, 30 days and over, at a set interest rate. You can choose one of two options; non-redeemable GICs or GICs that are redeemable at any time. If you choose non-redeemable, you cannot access your money until the term reaches its end. With redeemable GICs you can access your money at any time, but the interest rates are often lower than if you held the GIC to term.

HISAs

A high interest savings account, or HISA, is another great savings option. With this type of account you can earn higher interest than you can with traditional accounts. You may be required, however, to limit your transactions and to keep a minimum balance.

One thing’s for certain, it’s tougher to save if you don’t have an account. Do yourself a favour and visit your bank soon. Talk about your options. At the very least, set up an account so you can set money aside at your convenience.

The average age people in Canada retire is 63. Some retire later because they can’t imagine life without work, while others continue working only because they have to. When do you want to retire? How are you going to make sure you stop working when you want to?

The Perks of Hitting 65

All 65-year old Canadians are entitled to the Canada Pension Plan (CPP). Currently, retirees are entitled to $960 per month in CPP. They are also entitled to a maximum of $526.85 in Old Age Security (OAS). But is that enough to live on? Probably not, especially when you factor in rising costs.

If you want to retire early, you need to have a focused plan and put it into action early.

A Plan to Retire Rich

If you want to start a retirement plan or revamp your current plan, here’s a few options that will help you get the best bang for your buck in the years to come.

1. Contribute to a Registered Retirement Savings Plan (RRSP).

RRSPs are probably the most common retirement plan out there. Each year, you are allowed to contribute money to your RRSPs to help reduce your taxable income for the previous year. If you make a withdrawal from your RRSPs before you retire, you risk paying heavy taxes. Through the First Time Home Buyer’s Plan, however, you can withdraw up to $25,000 from your RRSPs to go towards the purchase of a home.  You have 15 years to pay yourself back and for most, this is a better option than paying the bank back for a loan!

2. Open a tax-free savings account (TFSA) and make regular deposits.

Since the government doesn’t make you pay taxes on the investment income you earn through a TFSA, they make for a great long-term savings plan. You will be penalized if you contribute to your TFSA, and it can be quite hefty too – 1% for each month you were in an over contribution position.  Right now, Canadians cannot contribute more than $5,000 per calendar year, plus any additional carry forward room from previous years.

3. Invest in life insurance.

No one wants to think about life without his or her partner – especially a financially challenging life. If you or your family members would be left financially strained without the other, life insurance provides great peace of mind. And that’s really what it’s all about – not so much retiring rich, but peace of mind.

4. Invest in income property.

Investment properties are a great way to build equity over time while your tenant pays your mortgage. Being a landlord is no easy task, though, and you’re still responsible for all of the maintenance and upkeep. Considering the mortgage interest (from your annual statement), property taxes, insurance, maintenance/upgrade costs, property management, utility bills, etc are all tax-deductible expenses, this seems like a pretty great deal it you have the cash flow for a down payment!

5. Focus on paying off your mortgage sooner.

There are a few simple changes that you can make to better manage your mortgage and pay off your home loan faster.  Make regular annual lump sum payments and switch your monthly payments to bi-weekly rapid payments.  The thousands that you save on interest can go towards your nest egg.

Let’s be honest; most of us don’t start saving for something until we really want it – by then most of us wish we started saving a heck of a lot earlier.

When we’re younger we save for smaller, more attainable things, like CDs, concert tickets and new clothes. As we mature, we start looking at the bigger picture – well, some of us do. Others find it a bit harder to avoid the fancy things in life and rack up debt from loans and credit cards.

There are many reasons why you might want to start saving some money – post-secondary education, a deposit for your first apartment or a used car. And then you get into things like marriage, mortgages, family vacations and – eeks – retirement.

Let’s take a closer look at what you should be saving for.

The Down Payment

Depending on the cost of the home and your financial circumstances, you should have anywhere between 5-20% of the home’s purchase price set aside for a down payment. If your down payment is 20% or more, then you fall under the “conventional mortgage” category. If your down payment is less than 20%, the mortgage is considered to be high-ratio and the lender will require you to purchase mortgage insurance as well.

The more you pay now, the less you pay later. Here’s where you save money with a higher down payment:

• You lower your monthly mortgage payments and make it easier to manage debt
• You pay less money in interest over the long run
• You don’t have to purchase mortgage default insurance

Education

If you have parents that have put aside some savings for your post secondary education – lucky you! If you don’t have that pot of money or you have small children and want to start building up their education savings fund, it’s in your best interest to start early.  The cost of education in Canada is high, and although you can take out a student loan to attend college or university, student debt sucks (I’m sure all will agree).

Registered Education Savings Plans (RESPs) can help you achieve your goal. Your savings are considered tax-free – until the funds are withdrawn. Depending on your family’s income, the government sometimes provides extra funds through the Canada Education Savings Grant and Canada Learning Bond programs.

Retirement

It’s hard to imagine just how much money you’ll need to be comfortable in the future, especially taking inflation into account. But don’t let the not-knowing part stop you from saving now. While many people wait until the end of the year and then rush to make an RRSP contribution before the deadline, you could make your life easier by setting up automatic monthly transfers with your bank. The money you contribute to your RRSPs is tax-deductible.

Whatever you want (Really? Yes, really)

Most people don’t want to safely set aside all of their extra money for the future. Some of us want to spend that hard earned cash on living today!  Whether it’s a trip to the spa, an overseas vacation or a new entertainment system. You’ve worked hard for your money and you’ve earned the right to spend it how you see fit – just don’t forget what mom always said and put some aside for a rainy day.

Financial planning – it sounds dead easy, right? So why would you pay someone to plan for you when you can do it yourself? Besides, isn’t the money you’d spend on a financial planner better off in the bank with all of your other… ahem – savings?

Think financial planning is easy, but don’t have the funds to prove it? Listen up.

What is a financial planner?

A financial planner is a trained professional who can help you manage your financial affairs so that you meet your life goals when and how you want to.

A financial planner is the most important person in your financial network. Choose the right person and they can put you in touch with everyone else you need to know, from investment advisors to accountants. Basically, a good financial planner will make sure that all of your financial needs are taken care of.

Certified Financial Planners (CFPs) are trained in 6 areas of financial planning:

• Asset management
• Financial management
• Estate planning
• Risk management
• Retirement planning
• Tax planning

As experts, they look at the big picture and make sure that all parts of your financial puzzle fit together.

When do I need a financial planner?

If you live alone, have $5 dollars to your name and find yourself dreaming about winning the lottery or getting an inheritance from a long lost cousin, you might not be the ideal candidate for a financial planner. Typically, financial planners work with clients who have portfolios of $50,000 or more.

As a general rule of thumb, if you think you have enough investments, and question whether or not you could be doing something more with them, then you could probably benefit from a professional’s advice.

What to look for in a financial planner

Since the person you choose to work with will be managing all of your hard-earned money, you want to make sure you pick the right person. Besides asking the usual what-are-your-qualifications type questions, make sure the person you choose has these four qualities. It’ll make all the difference in the world.

• Effective communication skills
• Strong time management skills
• Excellent organizational skills
• Enthusiasm

Read more on how to choose a Financial Planner >

Although some of us are better savers than others, most of us could still use a little help. As we grow and mature, so do our financial needs. It goes without saying then, that our savings plans should change with us.

Check out these practical savings tips for people of all ages and all stages of growth.

Tips for the Student

Besides the obvious ones – quit impulse shopping, hide the credit cards and give up (or cut back on) your bad habits (cmon… you know you have them) – here’s a list of quick tips to help you become a financially savvy student.

• Borrow books, CDs and DVDs from the local library instead of renting or buying them
• Buy machine washable clothing – dry-cleaning bills can be costly
• Invite friends over and stay in more often – limit going out to once a week
• Don’t worry about staying on top of the latest trends – your education is more important
• Look for bargains – check out kijiji.ca and craigslist.ca for cheap or free items
• Sign up for WagJag, Groupon and ethicalDeal – they can save you a bundle on entertainment costs

No matter what you’re studying in university, one of the biggest lessons you’ll learn in school is how to live frugally. Be wiser with your money and it’ll go much further.  Then remember to take those lessons you learned when you enter the ‘working world’ and continue to count your pennies.

Tips for the Young Family

It can be difficult for young adults to make the financial leap from life as a young couple to cash-strapped parents. The very first thing parents should do is cut spending. Think about your automated spending habits – that $3 latte you grab on the way to work every morning, for example, may no longer fit into the budget.

Here are some more helpful tips for managing the family budget:

• Set financial goals – if you don’t know where you’re going, how will you know when you get there? (Set goals for individuals, as well as the entire family)
• Track expenses – it will give you an accurate estimate of how much you spend (and what you spend on)
• Make a plan – Make a plan for of the categories for which you plan on spending money
• Stick to that plan – There’s no point in throwing together a plan if you don’t intend on sticking to it
• Evaluate the plan – Is it working? Were parts unrealistic? Revise the plan, if necessary
• Plan for emergencies – life doesn’t always carry on flawlessly
• Start your long term savings – If you have any extra cash put it towards retirement planning or an education fund for your children.

Since your plan is for your family and not just you, it definitely needs to be more focused. Follow it carefully and you will be able to reach your financial goals.

Tips for Singles

Single men and women are part of a social structure that emphasizes spending
money, which makes saving money a challenge for many of them. These tips will help
singles to save money, while still having fun.

• Reassess your living situation – you really don’t need much more than a small bachelor pad or a small space shared with a roommate
• Lower monthly costs on services, including cable, internet and cell phone bills (how much are you really at home to justify the land line?)
• Learn to cook – it will save you a ton on dining out costs
• Entertain at home, rather than heading out to the club – going out is much more costly than bringing the party home.
• Make a plan to pay of your debt – credit cards and students loans – as quickly as possible
• Save on monthly gym costs by exercising at home or outdoors

Tips for Older Couples

Many of us assume that the older people get, the better they are with money. Believe it or not, older couples still fight about money.

• Work with a financial planner to get the most out of your money and too make sure your retirement plan is solid
• Look into life insurance
• Be open – don’t be afraid to talk to your partner about their spending habits
• Form a budget and stick with it
• Downsize – the space you needed before is likely too much for you now
• Sell items that you no longer use
• Cut back on unnecessary monthly costs

Most everyone will have a savings account at some point in their life. Choose a savings account:

• If you want to set aside money for emergencies. Savings accounts are quick and easy to access, making them the perfect short-term solution.
• If you have extra money that you don’t want to spend right now, but want to easily access later.

Basically, a savings account serves as short-term money saving solution.

How does a savings account work?

The money you invest in your savings account will earn interest over time. You’ll make slightly more in interest through a savings account than you would through your chequing account. With a savings account, you have access to your money at any time either through a teller or by using a debit card.

Savings accounts also make good holding places for money you might not be ready to invest now, but may want to later. Once you’ve put aside a good amount of money, you may want to look into other, more lucrative savings options.