Friends of ours do premarital counseling, and due to the lack of financial education in Canada, I thought I would create a simple personal finance reference guide that our friends could use for the next couple they counsel. Although it is meant for couples who are first starting a new life together, some of the information might be helpful to people in other stages of life as well. So I thought I would share it on my blog as well.
RESPs
-Children need to have a SIN number, so apply for one as soon as your child is born.
-Government gives you 20% grant on up to $2500.00 of contributions per year for your child.
-Can be set up at any financial institution in Canada.
-Choose investments that are meant for long term growth such as mutual funds. Stay away from term deposits as your money won’t grow.
-Depending on your income, your child may also receive free money from the government in the form of Bonds so even if you can’t afford to put a lot into an RESP, set one up as soon as you have your child’s SIN, and when grandparents, etc. give your child money for birthdays, etc. just pop that money into the RESP.
-Note that it is wise to open a family plan RESP if you have more than one child.
-Select a financial institution that doesn’t charge any fees to have an RESP or to set it up.
RRSPs
-It’s a good idea to open an RRSP when you are young, and not wait to start saving for retirement when you are older. If you haven’t already done so, open an RESP and set up automatic deductions from your bank account on the same day that you get paid. Most financial institutions allow for a minimum of $25 per automatic contribution.
-Figure out how much you can afford to tuck away for retirement and then start doing it right away.
-If you are earning a lot of money at present, the tax deduction that you get from contributing to an RRSP is extremely valuable to you as you will end up getting a tax refund when you file your taxes. Even if you are not earning a lot of money, you still need to save for retirement, however, you may not need to use an RRSP to do so.
-Because you are young, select investments within your RRSP that are meant for long term growth. Don’t be afraid to take some calculated risks by investing in some mutual funds that are moderate to aggressive.
-Select a financial institution that doesn’t charge you any fees relating to having an RRSP.
TFSAs
-The Tax Free Savings Account is great as you can save for whatever you like within a TFSA and you don’t have to pay tax on any interest you earn from a TFSA.
-TFSAs are best used for long term savings purposes such as for a goal in the medium or long term or for retirement (for those not making a lot of income).
-Set up a TFSA and start automatic deductions from your bank account into the TFSA on the same day that you get paid.
-Determine what you are saving for and start saving now.
-Examples of savings goals could include saving for a car, furthering your education, a trip you plan to take, etc.
-Choose a financial institution where there are no fees to have a TFSA or to withdraw from it.
Investment Options
In any of the account types above, you will be given choices of how to invest your money within them.
Most financial institutions will give you the following options:
1. Savings – usually pays the lowest amount of interest and is only good for short term goals. Savings should never be used in an RRSP unless you plan on using your RRSP money to buy your first home in the very near future.
2.Term Deposits – also known as Guaranteed Investment Certificates (GICs). These usually pay more than Savings, but not always. Note that most term deposits involve locking your money in for a fixed period of time. So don’t select term deposits unless you have no plans on taking the money out for a long time. Note, also that term deposits never pay enough interest to keep up with the rising cost of living so you are actually losing money when you invest in term deposits for a long time. Not recommended for RRSPs and only good for people who think they will spend their money if it is not locked in.
3. Mutual Funds – when many investors pool their money together and have a professional utilizing the best money manager software to invest the money on their behalf, it is called a mutual fund. There are many different types depending on a person’s tolerance for risk and their time frame for their investments. For example, a young person who wants to save for retirement, should select mutual funds that have at least some risk. People who only have a few years to invest, should select something less risky.
Keep in mind that the more risk you are willing to take, the greater your potential reward over the long term. However, I would not recommend that you look at your mutual fund’s performance every day as you may get scared and want out, and that, my friend, is when you lose money.
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