So you haven’t managed to save double your salary by age 35. Whether this makes you laugh, roll your eyes, or question every decision you’ve ever made, everyone’s ability to build savings is different. However, organizing your savings into a few general types of accounts makes tracking and visualizing your progress easier. Most importantly, segregating your savings draws clear lines around the goals and purposes of each account.
Here are the four basic types of savings accounts everyone should have:
What it is: A rainy day fund that acts as a safety net against any surprise expenses that could derail your budget. Having a well-funded emergency account means you won’t have to rack up credit card debt or compromise your other goals by dipping into your vacation or retirement savings. Experts recommend a cushion of three to six months’ basic living expenses, including rent or mortgage payments, utilities, groceries, and transportation. This might sound intimidating, but even contributing in small increments of $10 or $20 is habit-forming and can add up nicely when left untouched.
Use it for: Job loss and extended illness, home repairs, car repairs, medical and dental emergencies, pet emergencies. Are you reading this on a cracked phone screen? An emergency fund could help with that too.
Account types: Emergency funds should be liquid and accessible. Stash your money in a savings account like a high interest savings account or tax-free savings account (TFSA) with no fees or minimum balance requirements that doesn’t charge for withdrawals or transfers. Tip: Most banks let you rename accounts, so you can specifically label yours “Emergency fund.”
Looking for a high-interest savings account?
Compare high-interest savings accounts
What it is: Generally defined as money you’ll need to access in the next two years, short-term savings are for discretionary purchases that require a little bit of time and effort to save up for. With clear goals and specific price tags in mind, you can calculate how much you need to save each month and start funnelling money into a designated account. But don’t spread yourself thin with too many goals – prioritize one or two at a time and you’ll reach them faster.
Use it for: Travel, wedding fund (throwing or attending), holiday shopping, a new suit or winter coat, the next $1,400 iPhone, household upgrades (new mattress, stand mixer).
Account types: Like your emergency fund, your short-term savings should be relatively accessible. Look for the highest possible interest rate on high-interest savings accounts and TFSAs – don’t forget to name the account(s). If you’re saving for at least a year you could park your savings in a guaranteed investment certificate (GIC). However, GICs offer higher interest rates on longer investment horizons of at least 2-5 years and generally can’t be redeemed earlier than the specified period.
Want a better GIC rate?
Compare the best GIC rates available
What it is: Money saved over a longer period of time (5+ years) to accomplish larger, more expensive, and more meaningful financial goals. Long-term savings are generally used to grow assets and contribute to future financial well-being.
Use it for: Home down payment, major home renovations, a child’s education fund, retirement.
Account types: Regular savings accounts on their own won’t cut it here – with interest rates around 2%, you’ll barely keep up with the pace of inflation. Make your long-term savings work harder through investing, which entails putting money into stocks, bonds, GICs, exchange-traded funds (ETFs,) index funds, mutual funds, and other investment vehicles (see: Investing Lingo 101) and generally requires a time horizon of at least five to 10 years and as long as 30-40 years. You can hold investments in accounts including:
- Registered retirement savings plan (RRSP) and spousal RRSPs
- Tax-free savings account (TFSA)
- Registered education savings plan (RESP)
- Registered retirement income fund (RRIF) and spousal RRIFs
- Locked-in retirement account (LIRA)
- Personal or joint account
You don’t need a lot of money to start investing, but you should first do a lot of research, ask questions, and decide how active you want to be in managing your investments. Seek out a fee-only financial advisor or a more hands-off robo-advisor, who can assess your situation, goals and risk tolerance and suggest an investment strategy.
What it is: A nest egg for your golden years. Ideally, you’ll contribute to your retirement savings fund regularly during your prime working years – but not touch it until your planned retirement age. The idea is to grow your savings as tax-efficiently as possible by depositing your savings into registered savings accounts (see below) and investing. The earlier you start saving and investing, the less you’ll need to save over your lifetime.
Use it for: Your retirement – whatever that looks like. It might be hard to imagine if it’s more than a decade or two away, but part of retirement planning includes how you’re going to spend your time and money – and that’s highly individual. Do you want to retire at 55 and spend all your time on the golf course, never working again? Will you want to work part-time in some capacity? Does everyone in your family live to be 100? Whatever the future holds, you need to save for it.
Account types: A registered retirement savings plan (RRSP) is essentially a tax-sheltered savings account. You contribute pre-tax income to RRSPs, which in turn reduces the amount of income tax you pay at source (read more on RRSPs). Any investment earnings grow tax-free while kept in an RRSP, but are taxed as earned income upon withdrawal. After age 71, RRSPs automatically convert into registered retirement income funds (more on RRIFs). TFSAs can also be used to save for retirement, but work a little differently: You deposit after-tax income into TFSAs, with any investment earnings growing tax-free. TFSA withdrawals aren’t taxed. (read more on TFSAs). When it comes to investing, time horizons and risk tolerance will be different for everyone.
Educate yourself on account types and remember that financial planning is highly individual – it’s best to set an investing strategy by getting advice from a professional, such as a certified financial planner.
- RRSPs vs. TFSAs
- What Is An Emergency Fund, and When Should You Use It?
- How To Keep Your Emotions Out of Investing