Tag Archives: saving

Motley Fool: Best vehicles for an Emergency Fund

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What are the best investment vehicles for holding a safe and highly liquid Emergency Fund? That’s the focus of the third in my latest series of blogs for Motley Fool Canada introducing the basic principles of establishing Financial Independence.

You can find the latest instalment by clicking on the highlighted headline here: One Essential Tip for Achieving Financial Freedom.

In the first two installments of this new series of articles, we looked at two key steps toward Financial Independence: jettisoning debt and, once that is accomplished, applying the resulting surplus to savings and ultimately long-term investments.

As the latest blog argues, you could even argue that an emergency cash cushion should take precedence over both debt elimination and saving/investing.

What should you be looking at in an Emergency Fund? First, you need liquidity: the ability to access the cash at a moment’s notice. Second, you want safety of capital, which really means cash equivalents or fixed income, not equities normally held with a time horizon of more than five years. Third, assuming some sort of fixed income that’s not locked up like a 5-year GIC, you want at least a reasonable rate of interest to be paid on it.

Normally, you shouldn’t regard RRSP investments as an emergency cushion, since you’ll have to pay tax to access the funds. Most people will try to keep relatively high cash balances in their chequing accounts that can serve as a cushion, although typically these accounts pay next to nothing in interest income. One possibility is short-term or redeemable GICs that may pay somewhere between 1 and 2% per annum. Another good place to “park” such funds is a High Interest Savings Account (HISA).

As the name suggests, HISAs pay high amounts of interest, usually more than 2%. According to this source, several pay more than that: as of mid 2019, EQ Bank was paying 2.3%, Motus Bank up to 2.5%, Tangerine was offering a promotional rate of 2.75%, and Motive Financial was paying 2.8%, Wealth One Bank of Canada was paying 2.3% and WealthSimple 2%. Pretty nice returns for liquid cash cushions! Continue Reading…

Motley Fool: How to move from Saving to Investing

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What’s the difference between Saving and Investing and how do you move smoothly from the one to the other?  Motley Fool Canada has just published the second in a new series of articles by me about the basic steps towards Financial Independence, or what I call “Findependence.” You can find the first one, which ran early in June, here; and the new one by clicking on the highlighted text here: 2 critical steps toward Financial Independence.

The first article discussed how the journey to Findependence hasn’t even begun while you’re still in debt. To paraphrase one of the characters in my book Findependence Day, you can’t even begin to climb the tower of Wealth until you get out of the basement of debt.

It’s nice to be free of debt, whether high-interest credit card debt, student loans or even a mortgage. It’s a big step moving from negative net worth to being merely broke, where your assets and liabilities cancel themselves out. Being free of all debt is certainly a nice place to be if you’ve been anxious over being hounded by creditors. But it’s not financial independence either, which is the stage of life when all sources of income more than meet your monthly financial needs.

As the followup article summarizes, you want to move from Debt elimination to the intermediate step of Saving, and then from Saving to true investing. Saving is being a loaner — you lend money to a bank or other institution and receive a small amount of interest back as well as your principal upon maturity. But to be an investor you want to be an owner: a business owner, through stocks or equities, or more broadly through a diversified basket of equity ETFs.

The end of the piece references a piece by Investopedia about the difference between investing and saving. You can find their explanation here. It says saving is for emergencies and purchases, by which they mean immediate needs. Investing is about a longer-term horizon (defined as seven or more years) and entails more risk than saving. That’s why they refer to the “risk free” return of investing in cash, treasury bills and the like.

Investing is about Money begetting Money

The beauty about saving is that, once the process is begun, it sets the stage for when  money begins to beget still more money, a process that will ultimately happen even while you’re sleeping. So does investing: the difference is that saving is a kind of junior partner to investing: it works a bit for you, but nothing so hard as true investing for the long term. Saving begets small amounts of money; ultimately, investing begets huge amounts of money: eventually enough to live on whether or not you choose to work another day in your life. Continue Reading…

Retirement #2 priority but four in ten Americans don’t see it happening

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Retirement is a close second to home ownership, according to a LendEDU survey of American saving priorities

While having enough money saved for Retirement is narrowly behind buying a home, more than a third of Americans don’t expect they’ll ever be able to retire, according to a survey released Tuesday from LendEDU.com.

Retirement saving was cited by 19% of 1,000 respondents, versus 20% prioritizing “buying my own house or apartment.” Paying off credit-card debt was cited by 14% and building an emergency fund by 10%.

While there was only a minor lack of confidence about paying off credit cards and building an emergency fund, 17% don’t believe they’ll ever become homeowners and but almost four in ten Americas (39%) don’t believe they’ll ever be able retire.

Of those doubting their ability to retire, 52% were over age 54, 30% were between 45 and 54, and 15% were 35 to 44.

As for emergency savings, 33% said a major bill resulting from an injury would destroy their savings and therefore their long-term financial goals; another 14% cited some form of debt that could quickly get out of hand. However, 28% felt “relatively secure” and did not believe their financial goals could be derailed.

Secondary priorities

After home ownership and retirement, the most cited financial priorities were some form of getting out of debt: 14% cited paying off credit-card debt, 7% paying off student-loan debt, and 4% cited paying off other forms of debt apart from credit cards or student loans. 6% answered “Building my credit score,” 5% wanted enough saved to move out of their parents’ homes and rent a home or apartment, 4% said “Buying a car,” and 3% wanted to start a business.

1% wanted to invest in real estate, another 1% wanted to buy a second home and yet another 1% wanted to buy a second or third car. 3% want to “create a retirement account” and 2% want to “invest in the market outside my retirement account.”

Money a bigger priority than Love?

Of the 37% who were not currently in a long-term relationship, 72% were more focused on their financial targets, versus a minority 23% who prioritized finding a romantic partner. (The rest preferred not to say). The survey sees this as a “glass half full” finding: “It is good that Americans are quite serious when it comes to realizing their personal finance goals. But, on the glass empty side, sometimes one’s finances can’t buy happiness, or in this case love, and it is always important to understand what is truly important in life.” Continue Reading…

The best Savings Accounts: based on what you’re saving for

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Image from unsplash

By Zack Fenech

Special to the Financial Independence Hub

Saving can be one of the most time-consuming methods of acquiring personal wealth, but if you choose the right account for the right goal, you can make the most out of this lengthy process.

The best way to make your money work over time is by choosing the best savings account based on what you’re saving for.

Picking the best savings account in Canada can maximize your interest return and (in some cases) minimize the amount of taxes you’ll end up having to pay.

How to choose a Savings Account

Generally speaking, there are three main types of savings accounts available: a Registered Retirement Savings Plan (RRSP), a Tax-Free Savings Account (TFSA), and a High-Interest Savings Account (HISA). Considering this, it’s important to establish what exactly it is that you’re saving for, and how much time you’re willing to invest with your money.

While this might seem obvious, it’s a crucial step in the financial planning process. By finding the best savings accounts based on what you’re saving for, you’ll be able to achieve your financial goals much more quickly.

The other side of the coin shows that not choosing the right account can cause roadblocks down the line and sometimes cost you money in early withdrawal fees and taxes.

For example, if your aim is saving on a down payment for your first house, but you have all of your money wrapped up in, let’s say, GICs, you won’t be able to withdraw funds early without a penalty.

But that’s not to say that savings accounts are only propped up for massive investments like homes or your retirement.

Saving up for a car, your wedding, or even a trip can have significant benefits on your interest return, but only if you pick the best savings accounts for your financial goals.

Base choice of Savings Account on what you’re saving for

If you’re unsure what it is you need to save for, consider these two questions before making any firm decisions:

  1. What is my financial situation like right now?
  2. Will I need to access the money I’m investing soon?

Here are a few suggestions why a TFSA, RRSP, and HISA are best suited for your short-term and long-term goals, whatever they may be.

Tax-Free Savings Account (TFSA)

A Tax-Free Savings Account (TFSA) isn’t exactly a savings account. Think of TFSAs as tax shelters. You can put cash, mutual funds, stocks, bonds, or GICs in a TFSA and shelter them from taxes, as long as you remain under your yearly TFSA contribution limit [currently $6,000.]

The contribution limit on your TFSAs depends on how much you contribute each year and the yearly contribution limit allotted by the Canadian Revenue Agency (CRA).

If you exceed your yearly TFSA contribution limit by $2,000, you will not be able to deduct the exceeded amount. Contributions that exceed the $2,000 threshold are subject to a 1% fee for every month the amount remains in your RRSPs.

[Editor’s Note: see reader comment below and refer to this explanation at the Canada.ca website.]

Registered Retirement Savings Plan (RRSP)

A Registered Retirement Savings Plan (RRSP) might seem like a savings account exclusively for retirement planning. However, it’s also one of the best savings accounts for saving for your first home.

An RRSP is somewhat similar to a TFSA. Both shelter your contributions from tax: so long as you remain below your yearly contribution limit. Unlike a TFSA, however, an RRSP does not allow you to withdraw money tax-free. Continue Reading…

Almost half of North American Boomers may delay Retirement over Savings Concerns

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Almost half of North American’s young baby boomers would consider postponing retirement because of Savings concerns, a survey out Wednesday finds. Even so, more than half  surveyed had to retire early, often because of circumstances beyond their control.

Franklin Templeton’s 2019 Retirement Income Strategies and Expectations (RISE) survey found that 21 per cent of Canadian young baby boomers (ages 55 to 64) in pre-retirement have not saved anything for retirement. And in the United States, 17 per cent of young boomers are in a similar predicament.

13 to 15% expect to work until they die

As a result, 46% of young Canadian boomers and 48% of young American boomers are considering postponing retirement, with roughly 15% of Canadians and 13% of Americans expecting to work until the end of their life. Furthermore, 22% of self-employed Canadians don’t ever plan to retire.

However, things don’t always go as planned: 54% of young Canadian boomers and 60% of their American counterparts retired earlier than expected, compared to 32% and 37% of Canadian and American older boomers aged 65 to 73.

More Canadian young boomers retired due to circumstances beyond their control than Canadian older boomers (34% versus 20%, respectively). There was a slightly wider gap amongst Americans: more American young boomers retired due to circumstances beyond their control than American older boomers (33% vs 17%, respectively).

Boomers in different life situations after post 2009 bull run

“In 2009, when equity markets started to recover, many young boomers were moving up the career ladder; whereas older boomers were approaching retirement at the top of their earning years,” said Duane Green, president and CEO, Franklin Templeton Canada. “A decade later, after a long bull market run, young and older boomers are in different life situations once again. We see many older boomers benefitting from the transfer of wealth from their parents, yet the young boomers have had a challenging experience balancing more expensive lives – due to caring for elderly parents and still having financially dependent children – all while saving for that increasingly elusive retirement.”

Nearly a quarter (24%) of Canadian young boomers in pre-retirement currently support a dependent family member, compared to 9% of retired older boomers. The top three sacrifices young boomers made for dependents were: saving less money, cutting back personal spending and withdrawing from personal savings. They were least likely to use employer vacation time or take unpaid time off work for caregiving.

“With life expectancy increasing and retirement savings becoming ever more challenging, due to the high costs of living, we are seeing increased concern over having enough money for retirement across all generations,” said Matthew Williams, SVP, Franklin Templeton Canada. “Although it’s never too late to start saving, the best time to start contributing to retirement savings vehicles is when a person starts out in their career and may not have big financial commitments like a mortgage or childcare costs: and to find a way to maintain healthy savings habits as they age.”

Those employed by companies offering group RSP or pensions that allows employees to make contributions directly from their paycheque — and perhaps receiving a company match to their contributions — should fully take advantage of this and potential ‘free’ money, as it will assist their retirement nest egg in compounding over time, Williams said.

Americans more concerned about medical expenses in Retirement

Of those Canadians who plan to retire within five years, 86% expressed concerns about paying expenses in retirement. 27% of these Canadians nearing retirement ranked lifestyle as their top concern, compared to 17% of Americans.

Continue Reading…