Before you start saving money, you need to set a savings goal. The same goes for saving in an RRSP.
Here are the steps you should take:
Decide what you want to save for—If you’re saving in an RRSP, you’re probably saving for retirement. You can also use the funds for a down payment on a home when you take advantage of the Home Buyers’ Plan (HBP).
Set a timeline for your goal—Retirement may seem like it’s decades away from now but it helps to have a target in mind. For example, you may decide you want to have $25,000 in your RRSP by the time you turn 30 or $100,000 saved when you’re 40. Having an exact target and date you need to reach that goal by will motivate you to try harder. However, make sure your goal is realistic or you may become discouraged.
Create a weekly or monthly savings goal—If you’re 23 now and want to have $25,000 saved by the time you turn 30, you need to save about $298 a month. But if you invest that money in a high-interest savings account, you might not need to save as much. If you expect to earn 2% in interest every year, you’ll only need to save $278 a month. If you decide to take on more risk and buy stocks, you may have a 6% annual rate of return. In that case, you’ll need to save just $241 a month. However, if the stock market takes a dive, you’ll have to save much more than $241 a month to reach your goal. If you want to hit your savings target faster, you should reinvest your tax refund in your RRSP.
Save automatically—Once you know how much you need to save on a regular basis, you should set your savings on autopilot. If you have a group RRSP at work, you can have your employer deduct a portion of your salary each time you get paid. You can also set up automatic weekly, biweekly, or monthly transfers with your financial institution. Ideally, this money should come out of your account on your payday so you won’t even notice it’s gone. Saving $75 a week adds up to $3,900 in a year. Over 10 years, that’s $39,000. If you invest that money and your annualized rate of return is 6%, you’ll have more than $53,000. Saving automatically means you don’t have to try to come up with the money for an RRSP contribution at the last minute. Don’t forget, the RRSP deadline for the 2016 tax year is March 1.
Keep track of your progress—It’s always good to check in to see where you are with your savings goals. If you’re behind, see if you can cut some expenses from your monthly budget to get back on track. But if you’re on target or you’re ahead, you should reward yourself. A pat on the back for a job well done every now and then can motivate you to keep saving.
The bottom line
If you want to save in an RRSP, you should have a goal and a specific timeline in order to reach your target. Without an objective and automatic savings, you’ll have a harder time saving for retirement.