Saving money in an economic recession is a little like trying to build a snowman in June. There’s not a lot of construction material to be found, and even if you can scrape a little snow together, there’s the risk your creation will just melt away.
“Saving 10 per cent of our gross income is considered ideal, but it can be a stretch at times,” says Chartered Accountant Peter D. Brown, principal of Peter Brown Inc. in Niagara Falls.
Experts like Peter say that one of the easiest and best ways to save is to set up an automatic deduction plan that moves a fixed amount of money into a savings or investment vehicle on a regular basis.
“Young people should meet with a financial advisor when they start working, and bring their company’s benefits information with them,” says Chartered Accountant Hazen E. Henderson, a financial planning advisor with Assante Capital Management Limited – Member CIPF, in Whitby. “Many times, there are pension enhancements or RRSP-matching plans that people fail to take advantage of because they don’t know about them. That’s free money being thrown away.”
With his mixed base of clients looking for investment advice, Peter often uses the “three-pots-principle” to explain how markets work.
“The first pot is money they’ll need in the next two years. This needs to be kept safe and should be invested in something non-volatile, like government bonds or money-market savings accounts.
“The second pot is mid-term money they’ll need in two to seven years. This can be put into something a little more aggressive, like a balanced mutual fund. Pot three – the money they won’t need for seven years or more – can be risked a bit. As time goes by, each pot gets replenished from the other. It’s really cash flow management.”
But if the markets are still too sketchy, or you need to come up with some cash to invest, don’t look any further than the taxman.
“One of the best and often missed opportunities is the Tax Free Savings Account (TFSA),” says Hazen. In 2010, Canadians can deposit up to $10,000 in any number of savings or investment vehicles (less what you put in last year), and any investment income or capital gains associated with that money is yours to keep tax-free, even when it’s withdrawn.
“Only about 30 per cent of Canadians have even opened an account, and far fewer have deposited the maximum,” he adds. “This is a give-away that everyone should take advantage of, and people earning less than about $40,000 a year may be better off with a TFSA than an RRSP.”
Other often-overlooked opportunities to save for education are the Registered Education Savings Plan (RESP) and the Canada Education Savings Grant (CESG). Under the CESG, the government actually matches a percentage of your contribution amount and deposits it directly into your RESP.
There is also the Registered Disability Savings Plan to help care for a loved one with special needs.
Both Peter and Hazen agree that it’s the consistency and habit of saving that will get you through the long haul, not the actual amount that you put in.
Peter’s advice can work for everyone: “Start by making a regular monthly payment to the Bank of Me.”
The Institute of Chartered Accountants of Ontario is the qualifying and regulatory body of Ontario’s 33,000 Chartered Accountants and 5,000 CA students. Since 1879, the Institute has protected the public interest through the CA profession’s high standards of qualification and the enforcement of its rules of professional conduct. The Institute works in partnership with the other provincial Institutes of Chartered Accountants and the Canadian Institute of Chartered Accountants to provide national standards and programs that are used as examples around the world. </em>
