Saving basics – YoungVestors

Saving puts you in control—you decide when to spend and when not to. But it does not mean you have to do without the things that are important to you. You can start saving on a regular basis, preparing for emergencies and large expenses. You’ll be able to use your savings to get things you could not get otherwise. Saving gives you the ability to make choices, instead of being pushed from one spending emergency to another.

This module will show you how to save steadily over time, without big sacrifices. In it, you will learn:

why saving regularly will help you
the power of starting to save early
some tips to make it easier to save
key ways to start planning and saving for your goals.

Tip

What about debts? If you have debts with high interest or fees, it’s usually best to pay them off first. The Credit and debt management module will help you learn how to manage debts. And if you can save an emergency fund, you will not need as much debt when unexpected costs come up.

Throughout the module, you will find learning tools that you can use now and in the future:

an online savings account selector that compares the features and costs of savings accounts in your province or territory
a savings calculator that lets you estimate how much you can earn with regular savings
videos showing why and how to save
an action plan of steps to take to get ready and start saving.

At the end of the module, you will find an Action plan. This is a tool that you can use to track your progress and take the next steps to save successfully in the future. Use the action plan as a roadmap for financial action!

Most of what we do takes money. You may be able to cover day-to-day expenses each month, but can you set aside some savings to pay for anything extra, like unexpected home repairs, a vacation trip, or becoming unable to work for a month? Saving is an essential part of managing your finances. If you’re just covering day-to-day expenses, you’ll have a hard time paying for anything that takes more money.

In this section, you will learn:

why people save—and why they don’t
the benefits of starting your savings early
guidelines for a savings plan that works for you.

Personal saving is always a good step. It will help you to meet your goals and provide a cushion for the unexpected. Your savings plan gives you the ability to meet your own goals and provide for your own future.

Saving means taking a longer-term view of your life. You might be perfectly happy with your life today. You might even have a little left over at the end of the month, which you can save for purchases like that big-screen television or a vacation in the sun. But if you look ahead, are you prepared for your future? Are you ready to:

plan for short-term items, like purchases that you don’t have in your monthly budget?
plan for mid-term items, like buying a home, getting more training or education so that you can get a better job, or investing for the future?
plan for the long term, like paying for your children’s education or getting ready for your retirement?

Unplanned events can happen, too. If you suffer an injury and can’t work, it may be months before you receive insurance or other compensation. If your home needs repairs, your only alternative to savings may be an expensive loan—if you can get it.

Here are some important reasons people save. Check the reasons that are most important to you.

Reasons people save

Saving helps you achieve important goals. Most people, even with a high monthly income, cannot pay for all the things that are important to them unless they save.

Saving gives you security. When unexpected expenses come along, or you have a sudden loss of income, you won’t be faced with the question, What do I do now? You’ll have a bit of a cushion to give you a chance to reorganize your finances if necessary.

Saving gives you choices. Savings let you look past just paying your current bills. Without savings, you don’t have the freedom to choose what’s important to you.

Saving saves you money. Without savings, when you want to do something that’s not in your current budget, you have to borrow money. Borrowing is expensive, because not only do you have to pay it back, you also pay interest, often at a high monthly rate. Saving lets you avoid the interest you have to pay to borrow money.

Life events and emergencies can be costly. Check the items on the list that you’d be able to pay for quickly:

What do you need to save for?

New kitchen appliances, $500 to $2,000

Major car repairs, $1,500 to $3,000

New home entertainment system, $1,500 to $3,000

Professional training upgrade, $500 to $2,000

Time off work and expenses to help an aging parent, $2,000 to $10,000

Starting a small business, $5,000 to $50,000

New roof on house, $6,000 to $15,000

Two-week trip for two to Paris, $10,000

New car, $15,000 to $30,000

Four-year university for a child living away from home, up to $80,000

What expenses do you need to plan for over the next few years? Are you prepared?

I am prepared

Expense #1

I am prepared

Expense #2

I am prepared

Expense #3

Saving can be a simple step that you don’t even notice.

First, pay off any expensive debts—debts that cost you more than you can earn in your savings plan.
Make a regular contribution—weekly or monthly—to a savings fund.
Start as early as you can. The money you save will grow slowly, but it will be there when you need it.

Sean and Helen began planning for their future soon after they got together. They decided they could put $250 a month into a savings plan and still do everything they wanted to do. With conservative investments, they earned an average of 3.5 percent interest on their savings each year. After 40 years together, they decided it was time for an early retirement. With over $260,000 saved, they had a helpful surplus to add to their pensions.

Their friends, Macario and Tala, began to save 10 years later. Although they saved a similar amount, $250 a month, they had only 30 years of savings when they began to look at financing their retirement. At the same rate of interest, an average of 3.5 percent over 30 years, they saved $158,000. They faced the choice of working several years longer or retiring with less money saved.

	Sean and Helen	Macario and Tala
Monthly saving	$250	$250
Years of saving	40	30
Total contributions	$120,000	$90,000
Interest earned	3.5%	3.5%
Total interest	$140,917	$68,603
Total savings with interest	$260,917	$158,603

Note: These are simplified calculations. In any real-life savings plan, many additional factors would be important, such as rates of inflation, taxes and investment costs.

Lessons learned:

Starting early makes a big difference to your total savings over time.
Interest adds to your total savings over time.

Most people know the reasons to save—but many don’t do it consistently. Why not? Sometimes you’re already spending all the money you have on essentials. But many factors besides reasoning enter into financial decisions. Our choices are affected by powerful forces like emotions, knowledge, habits and other behaviours. Check off which factors on the list apply to you when you make your financial choices.

Some reasons why people don’t save regularly

We do things the way we are comfortable doing them, as we did in the past. “I always go out for lunch. I could save the money and make lunch, but I’d have to get organized for that.”

We put off things until later, especially things we don’t really want to do anyway. “I’ll start a savings plan next year, after I go on this year’s vacation.”

We often downplay what we want in the future. We don’t think much about the future unless we have to. “I know I should keep my savings for when I retire, but I really need to remodel the kitchen this year.”

We don’t always know what we will want in the future, or what financial choices will be best for us, but we do know what we want right now. It’s easier to choose what we know we want. “I think it’s probably a good idea to save something for the future. But I know I want to go out for dinner tonight.”

It’s often hard to make clear decisions about the future, involving complicated choices and complex information. “Should I really choose the 3-year savings plan at 4% interest or the 5-year plan at 3.5% interest, with a right to choose a different rate after the first year?”

Often, we are over-confident in our own abilities. “I’ll be able to save more when I’m older, so I don’t need to worry about it now.”

We think saving means doing without. “If I put money aside, I won’t be able to have fun or buy the little extras I like.”

Add any reasons you can think of that are not listed.

Although many types of factors can affect your decisions, when you are aware of them you can take steps to overcome them. For example, an automatic saving plan is a good step for most people. Most financial institutions will automatically transfer an amount from your chequing account to your savings account every month. When your financial institution does it, you don’t have to think about it or make any decisions—and if a portion of your money is transferred to your savings account before you spend it, you won’t think of using it.

Tips

You can have your bank transfer money from your chequing account every paycheque to your savings account so you don’t forget.
When you get a raise, set aside part of the money into your savings account every month.

The most important thing is to recognize when these factors affect your choices, and to take steps to put good choices in place. Take a few minutes to think about the worksheet below. When you fill it in, you will be taking the first step to managing your savings.

Check off any steps below that would help you make—and stick with—better financial decisions.

Steps to better financial decisions

OK	Does not apply	Steps to help me save	When I’ll do it
OK	Does not apply	I will pay off costly debts that keep me from putting money into my savings.	When I’ll do it
OK	Does not apply	I will start an automatic savings transfer at my financial institution.	When I’ll do it
OK	Does not apply	I will talk to an adviser at my financial institution every year to learn about my savings plan and other financial options.	When I’ll do it
OK	Does not apply	I will make a written plan to set aside enough money for my future goals, and check once a month to see if I am on target.	When I’ll do it
OK	Does not apply	I’ll set a savings target with a group of friends, and get together to help each other to meet our targets.	When I’ll do it
OK	Does not apply	I’ll give myself an inexpensive reward (make my favourite meal, see my favourite video) every month that I meet my savings target.	When I’ll do it
OK	Does not apply	If I spend money on something when I know I should save, I’ll put an equal amount into my savings account before I make any more expenses.	When I’ll do it
OK	Does not apply	I will “pay myself first” and set aside a certain percentage of my income (e.g., 5%, 10% or 15%) for savings every month.	When I’ll do it
List any other steps you could take to help you stick with your savings commitments:
OK	Does not apply	other step	When I’ll do it
OK	Does not apply	other step	When I’ll do it
OK	Does not apply	other step	When I’ll do it

Once you’ve decided that you want to save, how do you go about it? Keep these tips in mind:

Make a plan for your spending and saving.
- Plan for the spending you need, but spend wisely.
- Cut back on spending on “wants” that are not very important (e.g., soft drinks, games, toys). Put the money you save into a separate account like an emergency fund or towards your mortgage.
- Focus spending on things that you really need and that will help you in your future (good quality items that will last, an affordable home, education for a better job).
- Set specific goals and work toward them.
Pay off expensive debts.
- If you’re paying high interest or fees, it’s harder to save any of your income. Pay down any debts that cost more than your savings will earn. For example, if you’re paying 18 percent interest on a credit card, and you’re thinking about a savings plan that will pay 4 percent interest, you’ll be much further ahead if you pay off the credit card first.
Pay yourself first.
- Set aside money from your income before you spend on anything else. Use what’s left to pay for other things. You’ll still be able to do most of what you want without feeling you have to scrape together enough to save.
- How much should you save? Some experts say to save 10 percent of your take-home pay if you can. If you can save 15 percent, you’ll quickly get much further ahead. But if you can’t save that much, set a realistic target and work to reach it.
- If your income goes up, put some of the increase (most of it, if you can) into your savings. It will be easier to do this before you get used to spending the extra money.
Grow your savings over time.
- Make a regular contribution toward your savings. To make it easy, set up an automatic monthly transfer to your savings account.
- As your savings grow, get professional advice on how to get the best return on your savings. (See the Investing module to learn about how to get started.)
Use tax shelters and other ways to keep the maximum amount of your savings.
- Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are a good way to reduce (or defer) the taxes you pay on your savings.
- Registered Education Savings Plans (RESPs) are great if you are saving for a child’s education, because the federal government and the government of Quebec will add to your contribution when you put money in a Registered Education Savings Plan.
- Tax matters can be complicated, so get expert advice on the best ways to use registered plans. See the Income taxes module, or go to the Canada Revenue Agency‘s information on income taxes.

See the video Why you should save and how, for more tips on saving.

Compound interest

An important key to growing your savings is the amount of interest (or other income) you can earn with it. Interest is money a financial institution pays you when you deposit your money. Usually, you receive compound interest—that is, the institution pays interest on the interest they have already paid you. This helps your savings grow even faster.

How fast can you save towards a goal? Try the Financial Goal Calculator to see how your savings will grow when you make a regular contribution to a savings plan.

Here’s an example: Suppose Jennifer has $250 in her savings account on January 25, 2017. She is thinking of buying a house in the future and would like to be able to save up $10,000. She decides she can have her bank make an automatic transfer of $250 every month to her savings account. How long will it take her to reach her savings goal with an interest rate of 4%? Inputting her information into the calculator, she finds that in only 3 years she can attain her goal.

[Source: Screenshot from the Financial Goal Calculator]

The Rule of 72

If you don’t have a calculator, the Rule of 72 gives you a quick way to see how your money grows with compound interest.

Divide the rate of interest into 72 to see how many years it will take to double your money.
For example:
- At 10% interest, your money will double in 7.2 years (72 ÷ 10)
- At 4% interest, your money will double in 18 years (72 ÷ 4).
You can reverse this: divide 72 by the number of years to see what interest rate you need to double your money.
For example:
- To double your money in 20 years, you need to earn 3.6 percent interest (72 ÷ 20).
- To double your money in five years, you need to earn 14.4 percent interest (72 ÷ 5).

The difference in the amount of interest paid may appear to be small, but over time it can amount to a lot more savings. The key is to start saving as soon as possible.

There are no fixed rules for saving except this: start as soon as you can. Your savings will grow over time.

It’s usually best to clear up any high-interest debts before starting your savings, because they usually cost more than you can earn with a savings plan. Pay these debts first and then regularly put the money into a savings account. However, if you have longer-term debt at a lower interest rate, like a mortgage, it’s good to set aside some money for emergencies while you pay off the debt.
If you have a choice, put your savings first into a plan that others will add to. For example, governments will add to your savings in a Registered Education Savings Plan (RESP), and some employers will also contribute to an employee’s retirement savings plan.
Also, a savings plan that defers or avoids taxes may be a better way to save than a plan that you pay taxes on. For example, savings in a Tax-Free Savings Account (TFSA) are tax-free, and a Registered Retirement Savings Plan (RRSP) lets you defer income taxes until you take your savings out of the plan. Go to the Income taxes module for more information.

These general guidelines depend on your personal circumstances. A financial adviser can help you decide on the best way to meet your goals.

Saving is a key step to help make sure your future is financially secure.
A saving plan based on regular contributions will let you accumulate money to meet your goals.
Compound interest will grow your savings even faster.
Start early to give your savings as much time as possible to grow.

At the end of the module, you will find an Action plan. This is a tool that you can use to track your progress and take the next steps to manage your saving successfully in the future. Use the action plan as a roadmap for financial action!