*Rates current as of May 17, 2019.
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 savings 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 and what savings goals they’re best suited for.
Use a High-interest Savings Account (HISA) for your emergency fund
Think of an emergency fund as a rainy day fund. It 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.
What is a High-Interest Savings Account?
A High-Interest Savings Account (HISA) is a savings account that provides accelerated interest rates and allows free withdrawals. You can, however, be taxed on the interest accumulated. Nonetheless, a HISA is a great place to park money for an emergency fund and receive decent interest returns in the process.
Use a High-Interest Savings Account for emergencies, such as:
- Job loss
- Extended illness
- Home and car repairs
- Medical emergencies
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.”
Use Guaranteed Investment Certificates (GICs) for short-term savings
Using GICs with the right term can help you beat out the regular interest rate of other accounts, meaning if you plan in accordance to your savings goals, you can see significant growth on your investments in a timeframe that you see fit.
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.
What is a GIC?
A Guaranteed Investment Certificate (GIC) is a savings tool where the customer lends a bank or credit union their savings over an agreed term in exchange for interest. Terms begin as short as 30-days and can run as long as ten years in term length. Your savings and the interest that they gain are insured by the CDIC — so long as they remain under $100,000 and 5-years in term length.
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.
Use a GIC for short-term savings, such as:
- Wedding fund (throwing or attending),
- Holiday shopping
- A new suit or winter coat,
- Household upgrades (new mattress, stand mixer)
Use a robo-advisors for your long-term savings
Using a robo-advisor over a longer period of time (5+ years) can 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.
What is a Robo-Advisor?
Robo-advisors are seeing significant growth in popularity and that autopilot investing has taken off since it was invented back in 2008. Much like a financial advisor, a robo-advisor allows passive investing. Decisions are using an algorithm through an online platform. Those without the extensive knowledge of stocks and trading can invest using a robo-advisor. A robo-advisor can make trades on their behalf according to risk tolerance, annual salary, and the amount invested.
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.
Use a Robo-advisor for:
- Home down payment
- Major home renovations
- A child’s education fund
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 robo-investor 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)
- Spousal RRIFs
- Locked-in retirement account (LIRA)
- Personal or joint account
Use a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) for retirement saving
Saving for retirement often takes the backseat in the minds of many Canadians. Still, retirement requires a lifetime of preparation, so it’s wise to start thinking about it sooner than later. Fortunately, as Canadians, saving for retirement allows significant tax benefits, and, with the right account, has several perks in which those benefits can be reaped.
What is an RRSP?
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).
An RRSP 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.
What is a TFSA?
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. When it comes to investing, time horizons and risk tolerance will be different for everyone.
A tax-free savings account (TFSA) is a savings account that shelters your savings from tax and allows unlimited, free withdrawals. Each year, the contribution room in your TFSA increases. With increasing contribution room and unlimited withdrawals, a TFSA is a great way of saving for retirement.
Use an RRSP and a TFSA 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 life to be 100? Whatever the future holds, you need to save for it.
- RRSPs vs. TFSAs
- What Is An Emergency Fund, and When Should You Use It?
- How To Keep Your Emotions Out of Investing
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