Many Canadians don’t understand the appropriate place to put their money in the various general situations. Everyone is at a different stage in life or has different circumstances like:
- in debt
- just getting by
- saving
- investing
- retirement planning
- retired
The following is where to put your money in order:
- Emergency fund
- Company RRSP
- Debt
- TFSA
- RRSP
- Savings / Investments
Emergency fund – Usually 3-6 months in an accessible account like a high interest savings account
Debt – Pay off your debt with the highest interest rate first. Sometimes you can consolidate several debts under one debt at a lower rate. It’s absolutely worth investigating to get the best rate.
Company RRSP – if your work does any sort of RRSP-matching, this means they will contribute usually up to some percentage of your salary to your RRSP if you contribute the same. For example, if your employer has a 3% matching contribution, that means that if you put in up to 3% of your salary into the company RRSP, they’ll put in the same amount (but not more). Effectively, this is a guaranteed 100% return that you cannot get from any other investment. Absolutely take advantage if your employer does this.
TFSA – is a wrapper for an account where you can store or invest money within that account. There is a limit to yearly contribution to your TFSA whether or not your investments make or lose money. You have already paid income tax on money before you invest, so regardless of how well (or bad) you do with your TFSA investments, you will not pay tax when withdrawing.
Why bother? If you put your money in long term investments like mutual funds, ETFs, or stocks, your gains will not be taxed at all. This is an amazing way to invest for the future.
RRSP – like the TFSA it is a wrapper for an account except money goes in before you pay income tax. This means that when you withdraw when you’re older, you will pay income tax; however, you typically won’t have a job when you’re retired, so your tax rate will be lower. It is suggested to invest in RRSPs after you’ve filled your TFSA because this typically means you’re older, making more, and paying a higher income tax where you pay more the more you make.
Another way to think about this is that if you make $72,000 per year, and put $10,000 into an RRSP, the Canadian government will only require you pay tax on $62,000 this year. But, when you withdraw that $10,000 later in retirement, you’ll be taxed then. The advantage here is that you don’t need $72,000 income when you’re retired, so your withdrawals are taxed at your lower rate.
Savings / Investments – Any type of investment you like where you will be taxed on your income. You may be using GICs (guaranteed income certificates), mutual funds, ETFs, or individual stocks.
