How to Save: Strategies for Saving Money Each Month
The Traditional Methods
There are many tried and true ways of how to save money each month.
- Every day put all of your loose change into a jar. Every once in a while deposit the money in your savings account. In time the money will grow into a little nest egg.
- Try to set aside a certain amount of money each month or each paycheque for your savings. People have been doing this for years, but it takes discipline.
A Newer Method: Pay Yourself First
How It Works
One of the best saving strategies is to pay yourself first. What this means is that you designate a certain amount of your paycheque as your pay (how novel) and you pay that money to yourself before you pay your bills or anyone else. This amount can be $25, $100 or maybe 10% of your paycheque. It can be any amount that you decide. The important part is that you pay yourself first rather than last. Most people pay all of the bills first and then save anything that might be left over. For most people, that method of saving doesn’t really work because nothing is left over to save.
If you pay yourself first, then money will get saved because paying yourself is now your first priority. The nice thing about this method is if your budget is a little tight, it forces you to make adjustments elsewhere and your savings continue to grow.
Paying yourself first also makes sense. Why are you going to work everyday anyway? To earn money for someone else? No way. You go to work to earn money for you and your family. That’s why you should pay yourself first—to make sure that your first priority is taken care of: you. It is not likely that anyone else is going to take care of you because they assume that you are taking care of yourself.
Pay Yourself Automatically
When you pay yourself first, you should set up an automatic way of doing this so that you don’t even have to think about it—it just happens. You can get your employer to deduct a certain amount and put it in your RRSP or you can set up automatic transfers with your bank (either online or at your local branch).
Most people who use this method find that they very quickly get use to living on a little less and soon they don’t miss the amount that they are paying themselves in their savings account. When you almost forget about automatic savings and let them grow, amazing things happen—automatically. Automatically saving $25 a week turns into $1,300 a year. Now if someone did this over a lifetime, they would get some fantastic results—automatically. If someone automatically saved $100 every paycheque (bi-weekly) from when they were 25 until they were 65, they would end up with almost $415,000 if they only received a 6% rate of interest. Of course someone could afford to save more once they got their house paid off. So their final amount could be much higher. Hopefully you can see how easy it can be to accomplish big things with just a simple automatic setup where you pay yourself first.
How to Become a Millionaire—Automatically
Another amazing thing about using automatic deductions or transfers to pay yourself first is that you can use it to become a millionaire—automatically. This may sound crazy, but it actually works. If someone automatically had $200 transferred from each of their bi-weekly paycheques into their investment account from when they were 25 until they were 65, they would end up with over $1,000,000 if they averaged a 7% rate of return on their investments. So a normal person can become a millionaire automatically without winning the lottery. This plan would require a little more sacrifice than most people are willing to make in their twenties, but it is entirely possible. Now you know how to become a millionaire…..if only you were 25 again.
The Smartest Method to Save Money: Have a Spending Plan
The very best method to saving money is to create a Spending Plan or a Budget ( learn how to make a budget). With a budget you figure out what your income is and what your expenses are. Once you know these two things, you can look for ways to reduce your expenses or increase your income to allocate an amount of money that you can afford to save. This is how the world’s largest corporations do it and this is how most of the world’s successful business people do it. This method takes a little bit of work at the beginning and a check-up every year or two, but it works.
The secret to this method (if you want to call it that) is to identify what you are spending money on so that you can begin to plan your spending. Once you begin to plan your spending, you will gain control over it and you will be able to plan to spend money on your savings. In other words, you will plan to put money into your savings account. Many people don’t like to plan their spending because it involves a little bit of work (once a year). No one is saying that success will come easily, but this little bit of work will pay off big time in many areas of your finances. We dare you to try it – what have you got to lose?
Ways to Save Money – How to Do It
Use One Savings Account
For some people, keeping things really simple works best. Ideally you should have . . .
- An emergency savings account
- At least one savings account for major purchases
- A retirement savings account
If this is too much for you, get started by simply putting your money into one savings account, and then grow your savings from there.
You can put money aside on a regular basis for a down payment for a house, a car, or for your retirement. To get started, all of this money can go into one account, and it can double as your emergency fund as long as you don’t have “emergencies” on a regular basis.
Use Many Savings Accounts
If you find a bank or credit union that offers a free savings account, you can open up several savings accounts. Then every time you get paid, you can put money into each of these accounts for every specific thing that you are saving for. This way you can keep your money safe from accidently being spent, and it will be there when you need it.
These accounts don’t have to be actual bank or credit union savings accounts, they can be high interest accounts, Tax Free Savings Accounts (TFSAs), RRSPs, term deposits, mutual funds, or other investments. Just make sure that you don’t lock up money in a long-term investment that you might need in the short term (learn more about the differences between saving and investing for the short-term versus long-term).
Places to Save Your Money – Where You Can Save Your Money in Canada
Under Your Mattress
We hope that you don’t do this. Every thief knows that this is the first place to look. Ditto with a roommate. Then there was that guy who dug a hole in his back yard and put $10,000 in cash into a glass jar and buried it. Later when he dug it up, he discovered that the water in the soil surrounding the jar had frozen in the winter and cracked the jar. Water then filled the jar and turned the money into a soupy mess. Because most of the bills were unrecognizable, he was not able to cash most of them in. All he was left with was one broken jar of expensive soup.
In Your Safety Deposit Box
Lots of people do this—just ask your bank’s tellers—they can smell it (old money stinks). Stashing cash in your safety deposit box is definitely safer than using a mattress or burying the money in the back yard, but not much smarter. Money in a safety deposit box does no one any good. It doesn’t earn you any interest. The government insures the money you deposit into an account at a bank up to $100,000 (and there are some ways to get higher coverage than this), and if you can’t trust the bank with your money, then how can you trust the bank with the stuff in your safety deposit box?
In Your Bank Account
A chequing account or a regular savings account is no place to save your money. Most of them pay hardly any interest. This is because the bank lends your money to other people when you aren’t using it. Money in a regular bank account might get used often, or you might need to withdraw it quickly, so the bank can’t lend that money out for very long because you might need it. The bank makes money when they can lend your money out for extended periods of time, and at higher interest rates, so then you earn more interest when they are able to do that. Look to earn more interest with High Interest Savings Accounts and Term Deposits or GICs.
High Interest Savings Accounts
These types of savings accounts are usually more restrictive than regular savings accounts, but they pay a lot more interest. Make sure that your bank or credit union is paying you a competitive rate (you can’t negotiate but you can move) and then save away. These types of accounts are usually safe, convenient and their interest rates usually move up as bank interest rates move up.
Term Deposits or Guaranteed Income Certificates (GICs)
If you know that you are not going to need your savings for a year or more, consider putting your savings into a Term Deposits or GIC (they are pretty much the same thing). These are a great way to try to get more interest on your money than a High Interest Savings Account can offer. However, this is not always the case, but it pays to check. Most banks and credit unions will allow you to put your money into a Term Deposit or GIC with a thousand dollars or more.
Tax Free Savings Account (TFSA)
For most Canadians, these are the best way to save. A Tax Free Savings Account is your own little tax haven. A TFSA is an official setup that shelters your investment from taxes. A TFSA account allows you to put up to $5,500 per year into your tax shelter and not pay any tax on the interest that you earn or on the growth of your investment. Then when you take your money out of the TFSA, you don’t pay any tax either. So now you don’t have to sneak off to the Bahamas or the Cayman Islands to invest your money and protect yourself from taxes. The government has kindly brought the tax haven to you. Whether you are saving up for a car, a down payment for a house or your retirement, a TFSA is a smart way to save and invest.
Register Retirement Savings Plan (RRSP)
Before the Canadian government introduced the Tax Free Savings Account (TFSA), an RRSP used to be one of the best ways for many people to save. An RRSP is still a good way to save money, but it is now primarily meant to be a way to save for your retirement. You and your tax advisor (if you have one) will have to decide if an RRSP is right for you.
An RRSP is basically just a setup that shelters your investment from tax until you withdraw your money from the RRSP tax shelter. With an RRSP setup, you can choose to invest in a vast array or normal investments: savings accounts, term deposits, mutual funds, stocks, bonds, and other investments.
The Benefits of an RRSP
- All contributions (within limits that most people never reach) can be used to reduce the amount of income tax that you pay. If you are paying a lot of income tax, contributing to an RRSP may be a good way of reducing what you are paying.
- As your investment grows in your RRSP, you don’t have to pay any tax until you take the money out of your RRSP. If you are saving for retirement and you know that your income will be lower than it is now, than contributing to an RRSP may be a good idea because when you take the money out when you are retired, your income will be lower, so the amount of tax that you pay on the money then will be less than what you would pay now.
- RRSP savings can be withdrawn for a down payment on your first home. The catch is that you have to pay the money back into your RRSP within 15 years. If you don’t do this, then the RRSP redemption becomes taxable and the government sends you a tax bill. Up to $20,000 can be withdrawn. The program that allows you to withdraw this money is called the Home Buyer’s Plan (HBP).
- Money can also be withdrawn from your RRSP for your education. Under the Lifelong Learning Plan (LLP) you can withdraw up to $20,000 for your education. This program gives you 10 years to pay the money back, but fortunately, you aren’t required to begin paying it back until 5 years after you graduate.
- If you ever have to declare bankruptcy, the money in your RRSPs is protected. The only portion that’s not protected is anything you contribute in the 12 months before filing for bankruptcy.
The Disadvantages of an RRSP
- All withdrawals from your RRSP plan are taxed as income.
- 10% to 30% of the money you withdraw from your RRSP is held back for taxes. The percentage that is held back depends on how much you are withdrawing. You can possibly get this money back when you do your taxes if you don’t end up owing the government any money.
- You must begin to withdraw money from your RRSP when you turn 69. The government has created a schedule that determines how much you must withdraw each year. Most people have been encouraged to use an RRSP to save for retirement. However, many retirees whose incomes have not declined in their retirement years have found that it was not in their best interest to invest in an RRSP. Once these people turn 69 and are forced to withdraw money from their RRSPs and pay tax on the money that they withdraw, they find that they are paying just as much tax – and in some cases more – as they would have to pay if they had invested outside of an RRSP.
There are numerous other investments that you can use to save your money: money market funds, bonds, stocks, mutual funds and the list goes on. If you plan to spend the money that you are saving within five years, it is best to find something safe to invest in. For most people a high interest savings account or a term deposit within a Tax Free Savings Account works just fine. These options are safe and sure—you know that your money is going to be there when you need it—the same can’t be said if you choose to invest in something that has a lot morerisk . . . like the stock market.
Where to Find Money to Save Each Month
Here are 10 places to get you started
Some things are easier said than done—like saving money. So you want to save money, but where do you find money to save if you don’t have anything extra right now? Here are some great places to look:
Get It from Work
- Raises at work
When you get a raise, put the extra money you are now earning in the bank. You lived on less before. Do you really need these few extra dollars, or does your savings account need them more?
- Bonuses from work
If you get paid a bonus, bank this money as well. You don’t need your bonus for living expenses because it is extra money that you can’t count on—that’s why it is a “bonus” to your normal wages. Bonuses are perfect for saving. If you need your bonus for living expenses, you probably have other financial challenges that need attention first.
- Overtime pay from work
In some jobs you can volunteer for extra overtime. Consider working a little overtime each week and then treat your overtime pay as something sacred and save it in a special account.
- Extra large commission
If you get paid commission for your job, consider saving a portion of any extra large commission cheques. It is so easy to blow money and then not know where it went. Use some of your extra large commission cheques to create something you will remember—a nice retirement, a comfortable home, or something else that you would like to save for. Use your savings to create a reward for yourself that will last.
Get It from the Government
- Tax refund
If you get a tax refund, use the money to increase your savings. To find out how to pay less tax so that you can get a tax refund or qualify for a larger refund, speak with your tax advisor or someone you trust. Two ways that many people reduce the amount of tax that they have to pay is by contributing to an RRSP and/or by donating more money to charity. If you set up an automated system where your RRSP or charitable giving is automatically debited from your bank account or deducted from your paycheque, these options can be easy and affordable.
- Tax Assessment
If property values have fallen significantly in your community, make sure that your tax assessment value is fair. If it’s not fair, apply for a re-assessment. In communities where property values have fallen substantially, this can save you a lot of money in property taxes.
- Claim all expenses
If you are self employed, do you do your own taxes or do you have a professional accountant with a professional designation like CA, CGA or CMA do your taxes for you? If your taxes aren’t being done by one of these professionals, you could be missing out on some big tax savings. If you think that these kinds of accountants are expensive, that may be true, but it is often more expensive to pay the government thousands of dollars in unnecessary taxes than to pay a good accountant a few hundred dollars to find these savings for you. If you are really thrifty, you can try out the accountant once to see if you are missing any deductions, and then you can go back to your old way of doing taxes and use the tax saving tips that you learned from the accountant.
Find It in Your Expenses
- Look for an expense to cut and save that money
Some people suggest that you increase your savings by cutting back on lattes or quitting smoking, these are good suggestions but there are also other big ways to save money. One way that a lot of people can save money—but something they often overlook—is to take a serious look at what they spend on their hobbies. Some people spend huge amounts on personal trainers, protein supplements, golf, skiing, and other sports. They don’t even consider how much they spend because they believe that they are spending it on something healthy or on something they love. If you have a pressing concern—like getting out of debt—cutting back what you spend on a hobby, even just for a while, may be a great option to consider. If you’re looking for money to save, your expenses could be a gold mine. Here’s one great place to look: the average vehicle owner spends $9,000 per year to own and operate their vehicle. Is there any possibility you could downsize to a smaller, more fuel efficient vehicle, buy a quality used vehicle rather than a brand new one, move closer to work, car pool, or take transit? Here’s another way to think about this: the average Canadian car loan payment is $570 per month. If someone invests this from age 25 to 65 in mutual funds or an index fund and receives an average rate of return of 11% (what the S&P 500 has done over the past 70 years), they will have over $4.2 million at age 65. Is always having a new car worth $4 million to you? Consider buying a quality used car and invest the rest. Your old car payment could literally end up funding your retirement (by the way, it’s never too late to start saving. If the person in this scenario saved this car payment from age 40 to 70, they’d still have a million dollars).
Another easy way to find money to save is to look at credit card statements for the last few months and see what you could have gone without and would be able to survive going without next time. You save even more money if you leave the credit cards at home and only pay with cash. Studies show that we tend to spend 15% more when we pay for things with credit. For the average Canadian household who puts everything on credit, they could save over $3,000 a year if they bought everything with cash instead. Sure they’d have to give up their points or cash back, but assuming they used the best cash back cards in Canada, they’d only be giving up $400. They’d still be looking at a big win.
- Review your debt payments
Take a look at the interest rates on any debt payments you may have. Regardless of how low your interest rate is on your line of credit, credit cards, mortgage or a loan, if you look around and see what other companies are offering for the same product you may find that you can do better. If you’re paying 5% interest on your line of credit, you may be able to show your bank that others are paying 3.5% and get them to do the same for you. If you’re paying 20% interest on a credit card, see if your credit card company has a lower interest rate card. You may be able to get them to move you to a 12% card, or you may be able to find an even better rate somewhere else. If you have a mortgage, have a chat with a mortgage broker and make sure you’re getting the best rate possible.
If you are carrying balances on credit cards or store cards, review your balances and your monthly payments. If you have a balance of around $1,000 on one card, you may be making $30 monthly payments. Find a way to pay off this balance with a bonus from work, a tax refund, or by increasing your payments. Once you’ve paid off this debt, you’ll have $30 more to work with each month. Use this approach on your next smallest debt, eliminate it, and you’ll free up even more money each month.
If you’re struggling to make the minimum payments on your debts, your best move may be to sit down with a non-profit Credit Counsellor,have them review your financial situation,and see what your best options are to get your finances back on track. If you’re really have a tough time making ends meet, you may qualify for interest relief.
- Track your spending and create a spending plan
Tracking your spending is the very best way to identify areas that you can save money. Written out in black and white, most people are surprised how much they spend and areas where they can cut back become very clear. All you need to do is track your spending for one month to get a good idea of where your money is going. Many people think, “Oh, I don’t need to do that. I already know where I spend my money.” The truth is surprising to most people; they really don’t realize how much they spend. You can’t say that you know how much you spend unless you have tracked your spending.
Once you’ve identified where you are spending your money, and you see areas where you would like to reduce your spending, you need to set an amount that you think is reasonable to spend and stick to it. To stick to your spending limits, you need to create a spending plan, and then follow your spending plan by only spending the amounts that you set out to spend in your plan. This is a very simple thing to do and it is a very effective method to control you spending. It is often called budgeting.
Tips for How to Keep Your Money Safe from Yourself
Some people recognize that their biggest obstacle to saving money each month is themselves. If you think that this is part of the reason why you can’t seem to save any money, here are some strategies and tips to try out to keep your money safe from yourself.
- Have your bank remove access to your savings account from your bank card and your online banking. If you have to go into the bank to get the money out, you will be far less likely to spend it. Going into the bank to make a withdrawal will give you more time to think about a purchase before you go ahead with it.
- If you live with a partner, and your partner is clearly a better saver than you are, consider giving your partner control of your savings. This will make it harder for you to spend your money.
- Invest your money in an investment or with a company that you have to contact and request a withdrawal from. It will usually take a number of days to get your money out of an investment company like this. That will give you extra time to think about your decision to spend this money. If by the time you get the money out, you decide that you shouldn’t spend the money, send it back. When you withdraw money from investments like this, your investment advisor or investment representative might ask you why you are withdrawing the money, this might create another barrier to keep your money safe from your impulses. Some common investments that require you to ask someone to take your money out include term deposits, mutual funds, and all types of RRSPs.
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