The arrival of the Coronavirus has been a massive hit on our economy and even employment. Even so, government relief efforts have provided most Canadians with a grace period of fewer bills and a steady flow of monthly benefits. Those who have been lucky enough to keep their jobs have also been able to set aside money, as our typical day to day spending has decreased.
What, though, are the best options for saving money amid the pandemic?
With so many options and hard sells, deciding where to invest your savings can be a very daunting decision. Let’s consider the following:
PAY OFF YOUR MORTGAGE
For many, the idea of applying lump-sum payments to their mortgage is attractive. When considering using your savings in this way, it’s important to set emotions aside, as “…a mortgage can present a number of emotional issues. We feel secure at the thought of owning our home. Ironically, paying off a mortgage can actually make us less financially secure if doing so requires us to use up all of our available cash.” – DoughRoller. While this option may seem like an ideal way to spend your savings, Forbes highlights significant arguments against it:
- You’re not maxing out your retirement savings.
- You have considerable high-interest debts to pay.
- If there is a chance, you might move.
PAY OFF DEBT
It is wise to take an honest look at your debt. Do you have a car loan, a line of credit, or credit cards? These financing options can quickly snowball into more considerable amounts than you initially set out to borrow. Credit cards are a quick draw when making purchases online, and rarely do we take a minute to consider the expense. In all three cases, interest rates are the real issue. Financing and credit loans come with a hefty interest rate, much higher than a mortgage rate. If you decide to use your savings to pay off your debt, start with the highest interest rates first and work downward. Not only will it lower your debt, but it will also enrich your credit rating. Dave Ramsey suggests the following order of priority:
- Save/keep $1000 on the side.
- Pay off debt, starting with the highest level of interest first.
- Build an emergency fund of three to six months-worth of expenses.
If the pandemic has taught us anything, it’s that no one is immune to unexpected job loss. The rule of thumb for an emergency fund is three to six months’ worth of expenses. However, the exact amount depends much on your unique circumstances. “If three months of expenses will be sufficient in your world and you can sleep at night with that number, then don’t feel swayed to go beyond that amount.” – The Balance. Things that might qualify as emergencies are:
- Paying rent or mortgage during job loss.
- Vehicle Repairs.
- Health & Wellness Care.
MAKE CONTRIBUTIONS TO YOUR RRSPS
Contributing more to your retirement savings is a healthy decision if your debt is low, and you will contribute enough to earn a sizable credit on your taxes. If you plan on buying a home, you will be able to use your RRSP (Registered Retirement Savings Plan) as funding when the time comes. If you are close to retirement age, adding your savings to your RRSP is an excellent idea, as you will pay fewer taxes when you withdraw the money than if you were still employed. Get Smarter About Money highlights these other great reasons to add to your retirement savings,
- Contributions are tax-deductible.
- Savings grow tax-free.
- Convertible to regular payments upon retiring.
- Spousal RRSP can reduce your combined tax burden.
ADD TO A TAX-FREE SAVINGS ACCOUNT
TFSAs (Tax-Free Savings Account) are a secure and ideal place to store your savings. “One of the greatest features of the TFSA is its flexibility in terms of when you can withdraw your money. Unlike an RRSP, you’re free to withdraw at any time without penalty, but there are government-mandated limits to how much you can contribute every year. ” – Wealth Simple. What you plan to do with your savings once they are in the TSFA is up to you. Here is how the general population uses their TSFA account according to Ipsos:
- 35% of TSFA holders see their account as an emergency fund.
- 25% of TSFA holders are using their account for general savings.
- 10% of TSFA holders are planning to use it to buy a home.
- Many also plan to use their TSFA to invest in their retirements.
INVEST IN YOUR CHILD’S EDUCATION
While money can be tight with a family of dependents, putting your savings into an RESP (Registered Education Savings Plan) is a great choice. Macleans‘ highlights the benefits, even if money is tight. “It’s simple and convenient. Your money might be tight, but family members and close friends might make contributions as birthday and Christmas gifts. It can add up quickly if you make a point of depositing right into the RESP.” As your children grow, or if your children are no longer toddlers, it is never too late to start contributing to an education fund. One of the draws of an RESP is that there are multiple government grants you may be eligible for. Government grants for RESPs include:
- CESG (Canada Education Savings Grant).
- CLB (Canada Learning Bond).
- QESI (Québec Education Savings Incentive).
- SAGES (Saskatchewan Advantage Grant for Education Savings).
- BCTESG (British Columbia Training and Education Savings Grant).
The best place for you to invest your savings is really unique to your personal circumstances. Make a list of your long term goals, examine your income, and discuss the matter with an accountant. Regardless of which investment is best for you, careful planning and extensive research will help you make the best use of your savings.
Many benefits are based on how much you invest. If you want to make the most of your investment, consider reaching out to us for a small loan. 24Cash is a local business based in Canada that provides various lending options to support hardworking Canadians.