By: Hailey Miller, Staff Writer
A few weeks ago, I wrote an article on the ABCs of Budgeting in Vancouver. It was so well received that I decided to write a part two. Without further ado, may I present to you some new and improved tips and tricks to help you keep on top of your financial A-game once again — or should I say, the HIJs of budgeting. Last time, I left off at growing your savings. Now, let’s do a deep dive into financial planning, investing, term deposits, escalators, funds, credits, and more — oh my!
While investing gives you the opportunity to increase your wealth, it inherently carries risks, and it is essential to exercise caution and diligence when managing your finances. The information provided in this article is for general informational purposes only, and should not be considered as financial advice tailored to your specific circumstances. It is your responsibility to conduct thorough research, seek guidance from qualified financial advisors, and understand the implications of various financial tools before making any investment decisions.
Handle your finances with care.
Your money is precious and finances are fragile. Be cautious with your spending and try to follow the 50/30/20 model. This model draws on the idea of putting 50% of your spending toward essentials and things you absolutely need (e.g. groceries, rent, bills), 30% of your spending toward things you want (e.g. non-essential shopping), and the remaining 20% goes toward either paying any debt that you may have, or, if you don’t have any debts, put this 20% into savings and investing.
Invest responsibly.
This brings me to my next point. What even is investing, and how do you invest responsibly? Investing involves putting money into allocated mediums such as savings plans, term deposits, funds, exchange-traded funds (ETFs), and the like to later increase your income and profits from the original invested amounts. For instance, if you invest in ETFs, you’re essentially buying a piece of a larger portfolio, mitigating your risk across multiple assets. For term deposits, if you invest x amount into one, the money that you contribute will increase a certain amount over a specified time. Depending on what type of investment you choose, the length of said investment, and the interest rate, your contributions will increase over time. These increases are particularly great for future savings, but, remember investing isn’t your only option. If your investing budget is relatively small, you might see little to no returns by the end of the investment period, and it might make more sense to save your money.
Jumpstart your savings with good interest rates.
Now, what is an interest rate, and how are you supposed to know your best option? An interest rate is a certain percentage that’s allocated for an investment amount. Let’s use a simplified term deposit example to explain how interest rates work. If you were to contribute $100 into a three-year escalating term deposit at a yearly constant 5% interest rate. After your first year you will have earned $5, giving you a total of $105. After your second year, you will have 5% of your new total, meaning you have $110.25. By the time the term deposit reaches its completion date, also known as “when it matures,” you will have $115.76, and by that time you can either take the money out and put it elsewhere (e.g. into different savings or chequing accounts), or you can renew it — hopefully, at a higher interest rate. Keep in mind that interest rates change as often as on a daily basis.
Know your term deposits.
Let’s use the above example of a three-year escalating term deposit (colloquially known as an “escalator”) again. Here’s the takeaway: the higher the interest rate, the more you’ll make. I consider anything under 4% terribly low and anything over 5% incredibly good these days. Banks are tricky when it comes to interest rates and investing, so doing your research on interest rates will make you more confident when it comes to getting the rate you want and need.
Interest rates don’t stay at the same rate for each year of an escalator or other investment medium. For example, although the total rate of a three-year escalator is advertised at 4.5%, you don’t receive 4.5% interest on your contributions each year. Rather, the total 4.5% is divided among those years (e.g. year one has an interest of 1.5%, year two has an interest of 0.5%, and year three comes in at 2%). Note that these rates may not be equally divided up for each year.
Learn more about savings plans.
It’s never too early to meet with a financial advisor, and you’re not too young to be investing for your future — including retirement. Whatever your plan may be, starting early is the smartest move. Doing so will give you a good sense of the importance of understanding your financial situation and investment options, alongside reducing financial stress for the future — whether that be six months from now, or 50 years down the line. There are many savings plans to take into consideration, including Registered Retirement Savings Plan (RRSPs), Registered Disability Savings Plan (RDSPs), Registered Education Savings Plan (RESPs), Tax-Free Savings Accounts (TFSAs), and more. Some savings plans are only applicable to you in certain instances. For example, you can only qualify for an RDSP if you have a verified disability and receive the disability tax credit. RESPs are only for post-secondary students whose parents, guardians, or other individuals invest money during your younger childhood years to later put toward their education. Important to note: TFSAs have a maximum amount that you’re allowed to contribute each year. The government sets a certain amount for you to shelter from being taxed based on your annual income. Find out more on your CRA account, and talk to a financial advisor.
Make the most of your financial options.
Similar to the above point, in order to choose the right financial options for your needs, discuss this with your financial advisor. Do your research on which investments and savings options are best suited for you. Don’t invest a large amount of money for a long period of time if you know you’re going to need that amount for an expense in the near future. For instance, don’t put a big chunk of your money in a long-term or non-redeemable deposit if you know that you have to pay your tuition, or you’re saving up to buy a car, appliance, or even a laptop. It’s great to save, and it’s great to invest, but the two don’t always have — or need — to work in cohesion with one another. Likewise, don’t rack up large amounts of credit and debts that you can’t pay, if you can help it. For instance, avoid charging large amounts to your credit card if you can’t pay the bill on time. If you don’t pay your bills on time, you’ll be charged interest, which will make matters worse by having to pay more. If you’re struggling with debts (either student debt or otherwise), discuss your options with your advisor, plan accordingly, and do your best to stay on top of your financial plan and budget.
Never withdraw too hastily.
Long-term deposits typically last one to five years, while short term deposits can last anywhere from 30 days to just under one year. If you take money out of a long or short-term deposit before the term matures, you will likely be penalized a certain amount depending on when you take the money out. Typically, each bank or credit union has different rules regarding penalties, so check with your institution and advisor prior to any withdrawals. Another important point to be aware of is the difference between redeemable and non-redeemable term deposits and funds. Redeemable typically means you can redeem your money throughout the investment period before the term matures. This is applicable for most escalators, GICs, and long and short-term deposits. On the other hand, non-redeemable means you cannot redeem your money while the term is still in effect before it matures. This is typically applicable for RRSPs, TFSAs, RESPs, RDSPs, and RRIFs where your money is “locked-in” for a longer amount of time. Different rules apply to different financial institutions, too.
Observe your finances and make necessary changes.
All this talk about chequing versus savings, term deposits versus escalators, redeemables versus non-redeemables, funds versus payments, and credit versus debit is probably making your head spin. Don’t worry, whether you’re new to investing and making the most out of your financial situation, or you’re a well-seasoned term deposit, interest rate chasing pro — financial planning can still be stressful and overwhelming. That’s why it’s important to plan ahead, be thorough with your options, utilize advice from advisors, and make adjustments when needed. If you’re not totally comfortable with investing or this is something new to you, a good rule to remember is to start safe and go slow. Before you know it, you, too, will be an investing pro!
