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Put your cash to work

As Canadians struggle to keep up with the rising cost of living, how can you feel less anxious and more confident about how to save and invest for the future?

December 12, 2022

Written by Robin Taub

Key takeaways

  • Create a budget and pay yourself first to save for your future.

  • Plan your short-term, medium-term and long-term saving and investing goals.

  • Park your cash contributions in accounts most appropriate to your needs.

Put your cash to work

Record inflation and rising interest rates have made everything from food to gas, to rent and mortgage payments, more expensive. As Canadians struggle to keep up with the rising cost of living, how can you feel less anxious and more confident about saving and investing for the future?

First things first: save for future you

“It's always a really great idea to have a grasp of where your money is going, and in the current inflationary environment, it's even more important," says Steve Slavner, Head Investments & Deposits, Sales & Service at Tangerine.

Track your spending, create a budget, and pay yourself — your future self — first. “Treat you and 'future you' as one of your fixed expenses to ensure you're setting aside some money for the future," says Slavner. "And make it automatic, like rent or your utility bill." 

It's also wise to have a reasonable buffer of cash in your day-to-day chequing account for unanticipated expenses like car or furnace repairs, an emergency visit to the veterinary clinic, or replacing a broken laptop. But if you leave too much money in a chequing account or low-interest savings account, you could be missing out on an opportunity to put your money to work for you, especially with inflation eroding purchasing power.

So what can you do with any excess cash or savings that exceed your short-term needs? Put it to work. But how you do that depends on your plans for the money — your specific saving and investing goals.

The short term

One of the big lessons of the pandemic has been the importance of having a dedicated emergency fund, typically three to six months of living expenses to get you through a health or other emergency, or a period when you're not working. "These earmarked funds need to be accessible and available," states Slavner. A high-interest savings account, for instance, offers liquidity if and when you need it. 

The medium term

For medium-term goals where you don't need immediate liquidity, but you're saving for something up to five years ahead, like a wedding, a down payment on a home, or a car, you can lock in a higher rate of interest by purchasing a Guaranteed Investment (GIC), available in increments that typically last up to five years. If you hold the GIC (or any eligible security) inside a Tax-Free Savings Account (TFSA), you won't pay tax on the growth. Then, when the GIC matures, you can reinvest it, or withdraw it from the TFSA without penalty. If you do take some money out of a TFSA, you get that extra contribution room back the following year, providing the ultimate flexibility.

Read more: The difference between TFSAs and RSPs

The long term 

“Long-term objectives or goals need long-term solutions," says Slavner. If you're saving for retirement, and you have a long time horizon, depending on your tolerance for risk, you can invest in stocks or bonds, or funds that hold these and other asset classes. These investments can be volatile — that is, their price can fluctuate in the short term — but historically they have generated higher returns over the long term. If you make these investments inside a Retirement Savings Plan (RSP), an account designed to help you save for retirement, you may enjoy tax-deferred growth on your investments. And unlike TFSA contributions, RSP contributions are tax deductible, meaning your contributions can reduce the taxes you would otherwise pay.

The fine print

There are detailed rules about how much you can contribute each year to these accounts, but the good news is that there's still time take advantage of this year's deadlines for contributing:

TFSA 

  • 2022 Contribution Room: $6,000 (plus any room from previous years that you didn't use up)
  • Key Date: Jan. 1, 2023, when more contribution room opens up in your TFSA

RSP

  • 2022 Limit: 18% of your 2021 earned income, up to a maximum of $29,210. Check your 2021 Notice of Assessment from the Canada Revenue Agency (CRA) for your personal 2022 RSP contribution limit. 
  • Deadline: March 1, 2023 (to deduct on your 2022 personal tax return)

In these uncertain times, the best way to feel more confident is to take control of your money!

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