Start saving and investing as early as you can

When you’re just getting started with investing, there can be a lot to learn. But keep in mind that the earlier you start, the more you’ll be able to take advantage of time. The longer you have to investInvest To use money for the purpose of making more money by making an investment. Often…+ read full definition your money (your time horizon), the more you’ll be able to benefitBenefit Money, goods, or services that you get from your workplace or from a government program…+ read full definition from the power of compounding. You’ll also have time to practice valuable habits like budgeting and saving, and to plan for goals like paying down debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set…+ read full definition. 

Remember, starting early doesn’t mean saving money you don’t have. If you’re investing but finding it hard to cover monthly expenses, that’s a sign to revisit how much you’re putting towards your investments. It’s better to save or invest small amounts consistently, than to overdo it and need to use credit to cover expenses.

Knowledge is power: If you’re thinking about investing, make sure you do research so you know what you’re investing in and to avoid scams.    

2. Figure out a budgeting strategy that works for you

It’s easier to save and invest when you know how much you can realistically put aside each month. And budgeting doesn’t need to be complicated — there are lots of ways to make a budget.  Budgeting while you’re living on your own for the first time can involve a few more tips and tricks. The most important step is to compare how much money you’re bringing in with how much you’re spending each month. If you don’t have much extra money at the end of the month — or you’re over spending what you earn — then you’ll need to find money to save, or cut some expenses.

Over time, you can increase — or decrease — your monthly contributions when you need to. As your life changes you may have changes, in your income level or new expenses like family needs or changes in your cost of living. It’s always a good idea to revisit your budgetBudget A monthly or yearly estimated plan for spending and saving. You work it out based…+ read full definition whenever life changes happen.

3. Start an emergency fund

In an ideal world, you would create an emergency fund in your 20s and continue to add to it, so that you’re always able to cover at least three months of expenses. But the reality is that there’s no wrong time to start saving for an emergency. An emergency fund is money you set aside for unexpected events, like job loss, illness, or relocation costs.

If saving for three months of expenses seems daunting, start by aiming for one month’s worth and go from there. It’s ideal to put the money in an accountAccount An agreement you make with a financial institution to handle your money. You can set…+ read full definition you can access when you need it, that is also separate from where you keep funds to cover your day-to-day expenses. You can put the money in an interest-bearing savings accountSavings account A bank account intended for depositing funds. Pays interest and lets you withdraw cash at…+ read full definition, or a Tax-Free Savings Account (TFSA) that you can easily withdraw funds from when you need them.

4. Pay off high-interest debt

There are times in your life you may have larger amounts of debt to repay. This could be paying down debt from student loans, credit cards, or debt from a large purchase like a car. Debts that have high interest rates — interest rates that are higher than what you might earn from investing or savings — take away from your ability to build wealth. This is because high interest debt will accumulate faster than your savings will grow.

If you’re not sure where to begin, consider paying off the loanLoan An agreement to borrow money for a set period of time. You agree to pay…+ read full definition with the highest interest rateInterest rate A fee you pay to borrow money. Or, a fee you get to lend it.…+ read full definition. To figure out which debt is costing you the most, look at the interest rate you’re paying. Paying down the debt with the highest interest rate will reduce the amount you’ll owe in interest in the long termTerm The period of time that a contract covers. Also, the period of time that an…+ read full definition. However, there are several approaches to debt repayment.

Depending on where you live in Canada and your field of study, you may be eligible for student loan forgiveness. This may reduce your student loan debt substantially as well as reduce the length of time it could take you to repay it. Learn more about student loan repayment assistance.

5. Start a retirement fund

While there are many different life goals you can save for, retirement is the number one reason to invest for a lot of Canadians. There are a few different sources of retirement income to consider, and not all of them involve personal savings. However, starting your personal retirement fund early will help you benefit from a long time horizon to grow your personal savings.

You could use a Tax-Free Savings Account (TFSATFSA See Tax-Free Savings Account.+ read full definition) for retirement savings, as these accounts can be used for any type of goal and can also hold many kinds of investments. Or you may consider using a Registered Retirement Savings Plan (RRSPRRSP See Registered Retirement Savings Plan.+ read full definition) if you are earning a moderate income. RRSPs have taxTax A fee the government charges on income, property, and sales. The money goes to finance…+ read full definition advantages that are most suitable for people earning moderate to high incomes.

Also, if you have a job with access to an employer-sponsored retirement plan, take full advantage of it, whatever your age. Some employers have contributionContribution Money that you put into a savings or investment plan.+ read full definition matching programs that will match a certain percentage of your own contributions.  

6. Look for ways to make saving and investing automatic

Life can get complicated for many reasons, at any age. This makes it a good idea to start automating as much of your finances as you can, including savings contributions, investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition contributions, and bill payments. If you already know how much you can contribute each month, then making it automatic can save you some time and energy.

You can time the payments to match the day your paycheque lands in your account, so you know you’ll have them covered before other discretionary expenses roll in.

Making monthly or weekly investing contributions can help you take advantage of the dollar-cost averaging approach. For example, instead of investing $12,000 in one lump sum, you invest $1,000 each month throughout the year. It can be a way of managing risk, since market fluctuations can change investment prices over the course of the year.

7. Focus on your important life milestones

As your life becomes more complex, so can your finances. Your savings goals might include buying a vehicle, saving for a dream vacation, or planning a wedding. Long-term goals might be to invest for your child’s post-secondary education or save for a home.

• If you’re thinking about buying your first home, consider the different steps involved. If you can start with answering key questions like where you want to live, and the type of home that best meets your needs, these will help you figure out how much you likely need to save. Also consider whether the First Home Savings Account (FHSA) makes sense for you as a place to hold your savings for your down paymentDown payment The money you put into buying a large item like a car or home.+ read full definition.

• If you’ve started a family or are planning to have children, you’ve probably already discovered the expenses that come along with a larger household. Consider saving and investing money as you plan for parenthood, to help pay for things like childcare, clothing, and education. If you’re starting to save for your children’s education, look into the benefits of a Registered Education Savings Plan (RESP). Your savings grow tax-freeTax-free Money that you do not pay tax on.+ read full definition while in the account. However, unlike RRSPs, your contributions are not tax-deductible.

Whenever you experience a major life event such as a marriage, divorce, a loss, a move to a new home, a change in employment, or retirement, make sure you revisit your financial plan and investment strategy and adapt them accordingly. Getting advice from a qualified professional can help with planning steps like these.

8. Refine your retirement goals

As your investing time horizonTime horizon The length of time that you plan to hold an investment before you sell it.…+ read full definition gets shorter, it’s a good idea to review and refine your goals and investment strategy to help you fund the future you hope to have. Ideally, at this stage of life, you’re creating the conditions for a smooth transition.

You’ll want to have a clear idea of how much money you’ll need to live comfortably in retirement. For many investors, this is a stage to revisit their asset mix, and incorporate lower risk in order to invest for income instead of growth. Consider working with a certified financial planner or financial advisor to help you review and refine your strategy.

It’s also good to decide when you plan to retire — for many this is when they reach 65, but ultimately this is a personal choice. Try the retirement ready quiz to see what might make sense for you.

If you keep working beyond the age of 65, there are some benefits in that you have more time to save for retirement and accumulate income. You will need to postpone taking government pensions — like the Canada PensionPension A steady income you get after you retire. Some pensions pay you a fixed amount…+ read full definition Plan (CPP) and Old Age SecurityOld age security Canada’s largest public pension program. You qualify if you are age 65 and you have…+ read full definition (OASOAS See Old age security.+ read full definition) — which could ultimately increase the amount you receive each month.

You can also apply for CPP as early as age 60, and OAS at age 65. If you decide to retire by 65, ensure that you know how much you’ll need to cover your expenses and live comfortably for the foreseeable future. And ensure you still have that emergency fund in place in case of any surprises.

No matter when you retire, your TFSA can remain open as long as you live. While you must close your RRSP before you turn 70, your TFSA can continue to be used as a saving or investing account after you’ve retired.

9. Have a plan for your income in retirement

Consider all your sources of retirement income in your plan. This can include your RRSP, TFSA, CPP and OAS payments, and possibly other personal savings and investments. If you have an RRSP, you can either convert it to an annuity or roll it over into a Registered Retirement Income Fund (RRIF). You have until the end of the year you turn 71 to convert it to a RRIFRRIF See Registered Retirement Income Fund.+ read full definition You must take out a minimum amount each year. This amount increases as you get older. There is no maximum withdrawal limit. With an annuityAnnuity A contract usually sold by life insurance companies that guarantees an income to you or…+ read full definition, your payment amounts are locked in once you buy the annuity and cannot be changed.

CPP and OAS benefits payments are other possible sources of income in retirement. If you do have a RRIF, it’s important to understand how your RRIF withdrawals can affect your OAS payments. Depending on your total income, some or all of your OAS payments may be clawed back by the federal government. You may want to plan carefully and consult with a registered financial advisor, accountant, or tax professional to help you maximize your income while minimizing tax implications. 

10. Prepare your estate and legacy plan

EstateEstate The total sum of money and property you leave behind when you die.+ read full definition and legacy planning may take centre stage once you’re living in retirement. You’ll want to ensure that the beneficiaries on all of your accounts are up-to-date and reflect your current estate planningEstate planning The plans you make to build and manage wealth for your lifetime and thereafter. Goals…+ read full definition wishes.

It’s also a good idea to designate a Trusted Contact Person (TCP), if you haven’t already. Unlike a power of attorneyPower of attorney A written authorization for another person to make financial and health care decisions for you…+ read full definition, a TCP does not have authority to make decisions on your accounts. Instead, they can act as a resource for your financial advisor if they’re having a hard time getting in touch with you, if they suspect that you’re being financially exploited, or have concerns about your ability to make financial decisions.