Money Smart: What to do with those extra dollars

During her two years as a bank teller, Kathryn-Lynn Raskina met a lot of people who were drowning in debt and struggling to pay their bills. It wasn’t because they weren’t making enough money. It was because they didn’t know the first thing about debt or about managing their money. She doesn’t want you to be one of those people. She wants you to graduate money smart.

When you think about your future, what do you envision? Do you live in an amazing condo at King and Yonge? Do you get married, buy a house in the suburbs, and have a couple of kids? When you retire, do you move somewhere warm, like Florida? If you’re like me, you have your future all planned out. But what most of us don’t have planned out is how we are going to pay for it.

These days, the average condo in the downtown core sells for over $400,000. The price tag on your average wedding last year was more than $30,000. And I don’t need to tell you how much money it costs to put a kid through university. All of this costs money and as my parents told me repeatedly growing up, “ Money doesn’t grow on trees.” You have to work hard to make money and accumulate it by saving.

Saving is something that you should already be doing if you have the means to. It involves putting away those extra dollars every month that you aren’t spending on pumpkin spice lattes and cab rides home.

Susan Stefura, a certified financial planner with BeSpoke Financial Consulting, says the best way for students to save is to pay yourself first. The moment you get paid from your part-time job, you should be putting a percentage of that money into savings, essentially paying yourself, like you would pay a bill. Stefura says you’re doing well if you can save 20 per cent of every paycheque. The easiest way to do this is to pre-authorize the bank to do it automatically on your behalf. This way, “you’re developing a habit and you don’t miss it” Stefura says.

Before you open a savings vehicle, you need to ask yourself, “What’s this money for?” Stefura says.  If you need the money for a short-term goal, like buying a car, a Tax-Free Savings Account is the best choice she says.

A TFSA is a savings vehicle registered with the Canadian government that any Canadian, 18 and older with a valid social insurance number, can open. What’s great about a TFSA is that when you take out money of it, you don’t have to pay any tax on that money. Another bonus is that any investment income you earn within your TFSA is also tax-free.

The government puts a limit on how much money you can put in your TFSA every year. The limit used to be $5,500, but just this year it got bumped up to $10,000.

However, if you’re saving for a down payment on a house or condo, it’s better to put that money in a Registered Retirement Savings Plan, Stefura says.

When you take money out of your RRSP, most of the time, you have to pay tax on it. If your income is sizeable, using an RRSP to save is to your advantage.

When you make a contribution to an RRSP, that contribution is subtracted from your income, so less of it is subject to the taxman. Any money you earn within your RRSP accumulates tax-free, but the RRSP has yearly contribution limits. You can find out your contribution limit by looking at your 2014 tax return, or by logging in to your Canadian Revenue Agency account.

One of the times you don’t have to pay tax on money you take out of your RRSP is when you take it out to pay for a down payment on a condo or house through the Home Buyers’ Plan. The HBP allows you to withdraw up to $25,000 from your RRSP to pay for your first home tax free, as long as you repay it within 15 years. Pretty good, right?

Now, I know many of you have student loans and are living paycheque to paycheque, and that as a result saving can seem impossible. Students saving can be an “oxymoron” Stefura says. But every bit that you can put away does count. Maybe you can only save $20 a month. That’s okay. The important thing is that you’re saving.

Featured image by Augustine Ng