Saving just means setting money aside and not touching it so that in the future you can use it to pay for something you really want. It is the act of gathering up your money and making it grow. It is the beginning of the path to building wealth. It requires two necessary ingredients: having extra money available to you, and resisting the urge to spend it now. An optional but extremely important ingredient is to have that saved money earn as much interest as possible- this is when your money makes money, and it’s very powerful.
When To Start
There is some important business you need to take care of first. Some of this might be painfully obvious, but you have to make sure your bills are taken care of first. Especially the bills you require to live your life. Second, you need to be debt free. If you have debt and extra money, you need to put that extra money on your debt- to get it out of your hair and so you aren’t paying interest to anyone (and don’t rack up more debt!). This doesn’t include your primary mortgage though, you shouldn’t wait to pay off your house before you start saving- that will take much too long.
Third, you need an emergency fund. Before you do anything at all, anything suggested on this site or anywhere else, you need a small emergency fund. $500-1000 that you absolutely don’t touch. Once you have paid off your debts you should then increase your emergency fund so that it’s sufficient to cover all your expenses for at least 6 months. This way, if you lose your job or get a layoff, you won’t lose everything. An emergency fund is so, very important- and it is not to be touched except for medical, car repair, job or other similar true emergencies. A new power saw or purse is not an emergency!
How Much To Save
Remember when we did your budget back in the Budgeting section? Your Monthly Net Income represents money that you have extra above your expenses. Once that money is no longer being used to pay off debt, you can now use it to save. The more the better- if you can save it all, that’s great, just decide what you are saving it for.
Types of Saving
Short term saving is generally items you are going to pay for within the year. Things like holiday or birthday gifts, a new suit, a simple vacation or other small and inexpensive purchases. Medium term saving usually involves bigger purchases happening in the next few years. Another car, a house down payment, a major vacation or other things like this. Long term saving usually refers to retirement. It will happen some time in the future and this saving will usually benefit from the long term earning of interest the most. The longer term the saving is for, the more risk you can afford to take with your money and thus the higher interest you can shoot for. Make sure your retirement saving is taken care of before anything else. Shoot for 15% of your gross income.
How To Start
Pay a visit to your local Credit Union or bank and open a savings account. To avoid dipping into your savings, ask the bank to make sure your savings account is NOT linked to your debit card. That’s what your chequing account is for. Shop around. These days you can get no-fee savings accounts that earn more than 3% interest. Don’t take anything less than that. Many online banks are trustworthy and offer much higher interest. You must earn at least 3% to avoid losing money to inflation. Inflation is the yearly decline of the purchasing power of your money. This is discussed in another article. So if you earn 3% you are really only staying about even with your money. And that doesn’t include taxes on interest earned.
Anyway, once you have your savings account open, start a regular schedule of transferring money into it from your chequing account each time you get paid. Work this payment into your budget as if it was a monthly bill. Many banks allow you to set up an automatic monthly transfer- this is a good idea if you might forget. If your company offers a match on your RRSP contributions or if you think you are currently making more than you will need yearly in retirement, it’s a good idea to start socking money into an RRSP (401K). Get your employer to do this automatically, or if your job does not have this kind of plan, ask your bank to do it for you. A retirement plan like this is protected by the government and is sheltered from taxes until you retire. Try to fund at least 15% of your gross income toward your retirement savings whether it’s in a RRSP or other investments.
The key here is to save all you can and to be as regular as you can each month. You’ll be surprised how it grows.
The measly 3-5% you’re earning in your savings account is really not a long term plan. You have to look into other long term investing options. This is where learning about investments comes in handy. Depending on how comfortable you are with risk, you can earn over 10 or even 15% interest per year. As a good rule of thumb: divide the number 72 by the interest rate and that’s how long it will take to double your money. So at 8% interest it will take 72 divided by 8 equals 9 years to double your money.
Check out our Savings Calculator in the calculators section to get an estimate of how your monthly savings will grow over time. It can be fun to re-run these calculations as you increase your monthly savings or as you find a higher interest rate. It will also tell you how long till you reach your goal.
Tortoise and the Hare
You don’t need to have a lot of money, or even any money to build wealth. Even if you are starting with nothing and only saving $20 per month, this will still add up over time. And as your confidence and income grows, and as you reduce your expenses and refine your budget, you will find that the amount you can funnel to your savings will increase. It can be very rewarding and encouraging to watch the slow and steady growth of your savings and investments. The sooner you start the better, no matter how much or how little; consider this your wake up call: stop putting it off and start saving today!