I still remember when, as a kid, my mom opened my first savings account and introduced me to the world of interest. I was thrilled with the idea of getting extra money at the end of the month, just for having money in my account. It wasn’t until a few years later when I graduated from my no-fee kids’ account to one that dinged me with monthly fees, overdraft, and other charges that wiped out any meager interest I earned, that I started to realize that there was more to money management than simply sitting on a nest egg (tiny or otherwise).
The stage of life you’re at – whether you’re looking for your first home, focusing on paying down debt, thinking about your kids’ post-secondary education, planning for your retirement, or a combination of the above – will determine which aspect of money management you should focus on. (Hint: Hiding it in a mattress or burying it in the backyard is never a good idea.)
Paying Down Debt
Whether your main concerns are student loans, your mortgage, or everyday bills and credit card debt (or, again, a combination of the above), it’s always good to have a strategy to minimize the amount of interest you’re paying, and avoid getting hit with penalties.
The best approach is to pay off your most expensive debt – the ones that charge you the highest interest rates – first. Credit cards and utility bills tend the have the highest annual interest rates (typically 20 to 30 per cent, plus late-payment penalties), so you’ll want to pay those off first. If you don’t have the cash on hand, use a line of credit to cover those bills.
Student and car loans (aside from low- or no-interest incentive loans with new car financing) tend to be the next most-expensive debt, at a few points above the banks’ prime lending rate.
The lowest interest – and therefore the ones you should only focus on paying off once all your other bills are in order – are lines of credit, followed by mortgages.
Saving For a Rainy Day
Once your debt is under control, create a saving’s strategy based on what you’re saving for. For short-term goals (a vacation, car you’re in desperate need of, or an imminent home purchase), you’re going to need relatively quick and easy access to the money. In that case, you’re probably going to want to shop around for the savings account that offers the highest interest rate. Just keep in mind that these accounts often charge higher-than-normal service fees and may require a few days notice to withdraw large sums.
Funds At Your Fingertips
Another option is a tax-free savings account (TFSA). These investment vehicles are similar to RRSPs but, instead of getting a tax deduction the year you purchase them, any growth your investment makes is tax-free, and you’re free to make withdrawals whenever you need.
Stashing it Away For the Long Haul
If you’re looking to save for your kids’ college or university years, the smart money is to invest in RESPs. While the investment works much like an RRSP or TFSA, the real advantage here are the government grants – up to $7,200 per child over the lifetime of the plan.
For longer-term savings (like saving for the down payment on a dream cottage or simply building a secure retirement nest egg), you can look at high-risk, higher-potential return options like investing in the stock market or securities; low-interest, but secure investments like government bonds or GICs; or, ideally, a mix of the two.
Diversify and Retire Rich
For most Canadians, the core (and often sole) aspect of their retirement planning portfolio is a collection of RRSPs. With the federal tax incentive – every dollar you put into RRSPs is one dollar less you have to claim in annual income tax – it’s almost a no-brainer. But RRSPs are a mixed bundle of stocks and bonds. Anyone who’s owned any in the last few years knows that at best, they’ve only increased in marginal value. More likely, your portfolio is worth the same or less that it was two or three years back. The lesson here is a reminder in the importance of diversification.
It’s All in the Mix
A truly savvy DIY money manager will have a mix of investments: savings accounts, RRSPS and/or TFSAs, bonds, and maybe even a small stash of gold buried in the yard. (Okay, skip the last one.)