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Strategies for Saving for a Future Goal 

There’s no getting around it. With the cost of living on the rise, and with so many things competing for your money, setting aside a few dollars each month can be a real challenge. Whether saving for a down payment on a new home, a grand once-in-a-lifetime trip, or simply to establish an emergency fund, the realities of life can make it difficult to build your savings.

One of the savings strategies that continues to be successful is the “pay yourself first” concept. At first glance, this seems overly simplistic, but it does reinforce the idea that by making regular contributions to your savings, you can put yourself on a path to meet your savings goals.

Many savers have also found that opening a dedicated savings account in addition to their everyday banking account, is also beneficial. With a separate account, you can even set up automatic deposits to ensure you are contributing regularly to your savings without even having to think about it.

If you’re saving for a longer-term objective, you can further boost your savings by investing in a fixed-term GIC. The advantage of a GIC is that, depending on the length of the term, a GIC can generate a considerably greater return than a typical savings account. Oaken offers some of Canada’s highest GIC rates and if you know that you won’t require access to your cash for a year or more, you can select a long-term GIC with maturity dates ranging from 1 – 5 years.

If you’re unsure as to when you might need access to your funds, you can choose a shorter-term GIC. Oaken also offers cashable GICs that allow you to withdraw your money in as little as 30 days. If you’re new to GICs, check out this Oaken Blog article discussing GIC basics.

If you’re planning to invest in GICs, you might also consider holding your savings within a Tax-Free Savings Account (TFSA). With a TFSA, you can contribute up to the annual limit each year, and the interest you earn will be exempt from capital gains taxes. Another advantage of a TFSA is that you can begin to replace any funds you withdraw from your TFSA the following year.

Getting a Handle on Your Expenses

Of course, it’s easy to say, “just pay yourself first”, but when your budget is already stretched, adding to your savings is usually one of the first things to be sacrificed. If you’re finding it difficult to meet your savings goals, it may be time to look at your overall spending habits to identify areas where you can reduce your spending. This means you need to create a budget, and the first step to creating a budget is to list your expenses.

Gather up your bank statements for at least the past six months and go through each line and categorize each expense as either a “necessary” cost or a “non-essential” cost. Necessary costs incorporate such things as your housing expenses including rent or mortgage payments, utility bills and other housing-related expenses. Other necessary costs include groceries as well as outstanding loans such as automobile loans and credit card payments.

Once you have identified these regularly occurring costs, turn to the remaining expenditures. For the most part, these should be labelled as “non-essential”. Keep in mind, however, that just because we’ve categorized expenses such as restaurants and entertainment spending this way, this is not to say that you must eliminate these things altogether. The point of creating a budget is to help you better manage your spending and make informed spending decisions.

If you find yourself in a situation where you’re carrying a lot of debt, you might need to put together a plan to reduce your debt. This includes creating a debt repayment schedule that prioritizes your higher-interest debt first. In many cases, this means tackling credit card debt, which generally has a higher interest rate than most other loan types.

You also need to know that paying just the minimum required payment on your outstanding debt each month will end up costing you a lot more in the long run. When you pay just the minimum, the bulk of your payment goes to interest and very little is actually applied to the outstanding balance. Keep in mind also, that each month that you carry over a balance, more of your money will be lost to interest as interest charges continue to compound month to month.

Avalanche vs Snowball: Debt Payment Prioritization

Two popular methods of prioritizing debt for repayment are known as the “avalanche” and “snowball” methods. Here’s how they work:

The Avalanche Method

The Avalanche method is designed to help you clear your most expensive debt first. To get started, list all your debts and determine the minimum monthly payment for each debt. While paying the minimum will not pay your debt down, it will at least prevent non-payment fees and help protect your credit rating.

Next, identify the debt that is charging you the most interest and concentrate on paying as much as you can so you can retire this debt as quickly as possible. Once you’ve cleared that debt, you can then move on to the next highest interest debt.

The Snowball Method

The Snowball method is similar to the Avalanche approach, but it specifically targets paying off your smallest debts first. You still need to make all your minimum payments, but the idea is that by clearing each individual debt, you will gain the momentum and discipline to help you focus on the larger debts. 

The Snowball system is a little controversial as it fails to focus first on eliminating your most expensive debt. However, it is a systematic approach to clearing up your debt, which is still a very positive and worthwhile objective. Ultimately, if you have a heavy debt load that is preventing you from meeting your savings goals, the important thing is that you have an effective plan to address that debt as quickly as possible.