Get your accounts in order!
Say it with me.
Is the powerhouse of the cell!!!!!!!!!!!!!
If you went to high school in Canada, that phrase probably haunts your dreams.
So why do so many millennials know that little factoid, but not how to invest? Or take advantage of tax write offs? Or how to negotiate loan terms? Or how to build a strong credit score?
Most high schools don’t teach personal finance to young people, and we think that’s silly. Because where else are you going to learn these concepts—other than through trial and error later in life?
This series, High School Finance, unpacks basic personal finance concepts that every Canadian should know. If you’ve got an idea or a question for this series, let us know on Twitter or Instagram.
Today’s topic: savings accounts!
What Savings Accounts Should I Have?
Everyone has different needs, but there are three handy savings accounts that many Canadians use. These are high interest savings accounts, Tax Free Savings Accounts (TFSAs), and Retirement Savings Plans (RSPs).
What’s a High Interest Savings Account?
If you have a bank account, you probably have access to a savings account.
They work like counterpoints to your chequing account. Where your chequing account is the site where you keep money you’re planning on using, your savings account is a place to save your money, to let it accumulate and grow.
High interest savings accounts are savings accounts that earn you higher rates of interest. What does this mean? For every dollar you save in your savings account, the bank will pay you interest as a little thank you for saving with them.
But some savings accounts offer higher interest rates than others. Using a higher interest rate savings account means you earn more money in interest.
To explore higher interest savings accounts, take a look at what products your bank offers.
What’s a Tax Free Savings Account?
A Tax Free Savings Account (TFSA) is a type of investment savings account with a contribution ceiling that is sheltered from tax.
This means when you invest your TFSA, you aren’t taxed on your earnings. This means you can reinvest both your principal balance and any capital gains. This is an extremely efficient way to grow your savings.
The TFSA works in contrast to normal savings, where you generally need to pay tax on all of your earnings.
You may also choose not to invest your TFSA (though this kind of misses the point). TFSAs also may offer higher interest rates, depending on your financial institution.
But there’s a catch: you can only contribute up to a certain amount every year, and while there are no penalties for withdrawing your savings from your TFSA, you aren’t able to “re-fill” your account if that contribution would exceed your limit.
For example, if you’ve already contributed your max of, say, $3,000 for the year, and you withdraw $500, even though your account will only be holding $2,500, you won’t be able to re-invest that last $500 until next year. This is because you will have already invested $3,000 (your limit) in and then $500 later, bringing your *total* contributions that year up to $3,500.
You can find your contribution limit using CRA’s My Account function (google it!) or by calling the CRA directly.
What is a Retirement Savings Plan?
A Retirement Savings Plan (RSP) is a type of financial product designed to help you save for your golden years. A very common RSP is a Registered Retirement Savings Plan (RRSP).
RRSPs have a contribution ceiling too, but this varies from person to person. Generally, if you also invest in a company retirement plan, your personal contribution limit will be smaller.
RRSPs work in a clever way. Like TFSAs, when you invest in RRSPs, you aren’t taxed on your earnings, at least not right away.
In Canada, you are taxed depending on your income. People that make heaps of money are taxed more than folks that make a modest income. RRSPs allow Canadians to circumvent that taxation just a little by sheltering your investment income until you retire.
What happens when you retire?
Normally, you begin earning less money as your working paycheque goes away. In this lower tax bracket, your income is taxed less.
Therefore, when you start to withdraw your retirement funds from your RRSP, you will pay proportionally less tax than you would have paid in your peak earning years, saving you money.
Investing TFSAs and RRSPs
There are tons of different savings and investment products available to Canadians, and there are even subsets of TFSAs and RRSPs. There are group RRSPs, workplace RRSP schemes, and more.
Your bank probably offers both TFSA and RRSP products. But getting the most out of these accounts comes from investing them—simply relying on a higher interest rate won’t earn as many returns.
There are also lots of fintech companies in Canada that offer investment via TFSAs and RRSPs. Depending on your own affinity for risk, your savings goals, and contribution space, they can help you purchase things like stocks or exchange-traded funds to help your money grow.
Using Savings Accounts
Many Canadians make use of all three of these accounts.
A high interest savings account may be used for short term savings and funds that require quick access, for example, like an emergency fund or a vacation fund.
Maybe a TFSA is invested over a medium length term in exchange-traded funds in the S&P 500. And perhaps the RRSP is invested in slow growing products, developing over the course of decades.
How you arrange your finances is totally up to you. But taking advantage of financial products which enable your savings to grow more efficiently could be a game changer.
Do your research and choose wisely. Now save, save, save! 🚀
This blog is provided for informational purposes only, is not intended as financial or investment advice, and is not meant to suggest that a particular investing or financial strategy is suitable for you. If you’re unsure about a particular financial or investment decision, you may wish to obtain advice from a qualified professional.