King Arthur’s lesser known Knight of the Treasury
Save (verb) – to rescue from danger, harm, injury, or loss.dictionary.com
When it comes to money, I have to say I really like this definition of saving. To my mind it immediately conjures the image of a medieval knight leaning down from his horse and pulling a treasure chest out of a raging river, just before it’s swept away and lost forever.
I must have read too many fantasy novels when I was in school. Lord of the Rings and old English tales of chivalry were all time favorites. The idea is powerful to me.
Hold that image in your mind for a second and then think about your savings.
Not just how much you have or need but also what you are saving for, and equally important what you are saving from.
What you are saving from is often associated with unplanned spending, impulses and emergencies. But with good planning most of these perils can be avoided.
That’s why I recommend that my clients maintain three different accounts, an Emergency Fund, a Retirement Account, and a Totally Fun Account.
1 – Emergency Fund
If you have unsecured debts, like credit cards, start with just $1000.00 in a savings account at your bank then focus on getting out of debt. Once your debts are under control move your emergency funds to a TFSA and bump them up to the equivalent of 3 months of living expenses, whatever that may be. (If you are self-employed, seasonal or experience regular periods of low income, 6 months might be better).
This is money designated for unavoidable and unexpected expenses, like car repairs, or uninsured medical expenses. We all know Murphy’s Law so having a bit of money set aside can really help to keep old Mr. Murphy in his place.
2 – Retirement Account
Once you have a fully funded emergency fund open an RRSP for retirement savings and transfer 10-15% of your pre-tax earnings every month for the rest of your working life, and forget about it, treat this money as spent and completely out of reach until you have retired.
All contributions to an RRSP are tax deductible in the year you make them so by making the contributions using pre-tax dollars you are effectively giving yourself a raise and sheltering your income from the tax man.
You will pay tax when you withdraw the money, but that won’t be until after you’ve retired and have very few other sources of taxable income.
3 – Totally Fun Account
Lastly, once you have started your retirement savings plan and if you still have extra funds to work with, open another TFSA or Non-Registered Account, depending on available limits and save money just for you. This is where you set money aside for that Hawaiian vacation, Harley, or the Eleven Foot Grand Piano that is going to grace my dining room someday.
You can also dip into this fund for smaller fun things like the occasional fancy dinner with friends or those cool boots you saw at Nordstrom last week that you just have to get.
In Canada we have two types of savings accounts that CRA has made available to us. The RRSP and the TFSA. Check out this article from the Toronto Star for a primer on the differences and why you would choose one or the other.
Have a great day – Lauren