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<\/p>Should I start a savings plan if I\u2019m still paying off debt?<\/h3>
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There\u2019s a clear tradeoff or balance that occurs between paying debt and saving \u2013 one involves money going out and the other involves keeping money in. Ideally, you should try to find a balance between saving and paying off debt. The earlier you start saving, the easier it will be to retire and achieve other life goals. At the same time, factors like credit card debt or student debt can haunt you down the road, so a portion of your income should go to eliminating debt too.<\/p>
A good strategy is to start paying off high interest debt, generally with interest rates between 9% and 20%, before you even start saving. The rationale is that high interest debt costs you the most amount of money, so by paying it down first, you\u2019re saving money in the long run.<\/p>
With that in mind, you should have some sort of emergency fund, even if you\u2019re not committed to a savings plan yet. A good benchmark for your emergency fund is at least 3 months worth of expenses. The reality is, bad things happen to everyone. An emergency fund can help prevent you going into further debt to cover emergency expenses.<\/p><\/div><\/article>
How much should I put towards a savings plan?<\/h3>
Unfortunately, there isn\u2019t a one-size-fits-all solution when it comes to a savings plan. How much you save depends on your income, expenses, financial goals and outstanding debt among other things. Most people incorporate a savings plan into their budget by calculating their income and expenses, then allocating what\u2019s left to savings.<\/p>
There is a savings strategy that is generally accepted by everyone called the 50:30:20 rule. First, determine what your earnings are then divide up the funds into these categories:<\/p>
- 50% is for needs. These are costs that are non-negotiable and are required for you to survive, such as rent or mortgage payments, groceries and utilities.<\/li>
- 30% is for wants. Everyone deserves to have some fun and that\u2019s what this category is for. These funds could go to clothes, vacations, dining out or entertainment. Virtually everything that is considered non-necessary falls into this category.<\/li>
- 20% is for savings. This category is dedicated to saving, building an emergency fund and paying off debts.<\/li><\/ul>
Keep in mind that the 50:30:20 rule is meant to be a benchmark. No one will be able to divy up their finances this way perfectly, but it\u2019s a good starting point. Below is an example of how to calculate where your money is going using the 50:30:20 rule.<\/p>
Need help figuring out how much to save? Check out Finder\u2019s savings calculator tool. <\/a><\/p>
Example: How does the 50:30:20 rule work?
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<\/h4>Sofie earns $4,000 in gross income a month and $1,000 is deducted from her pay for employer deductions. Her net earnings are $3,000 which means $1,500 (50%) goes towards needs, $900 (30%) goes to wants and $600 (20%) goes towards savings every month.<\/p><\/div><\/article>
How to get the most from your savings plan<\/h3>
Saving isn\u2019t always easy, but here are some tips to make the most of your savings plan:<\/p>
- Create a budget.<\/strong> Determine all your income and expenses, then calculate how much you can afford to save.<\/li>
- Set up automatic payments.<\/strong> For some people, \u201csetting it and forgetting it\u201d is the best way to save. It can also be helpful to set up payment reminders to better manage your cash flow.<\/li>
- Keep a goal in mind.<\/strong> Saving aimlessly can make it hard to continuously motivate yourself. By keeping a specific goal in mind, such as your dream home or an amazing vacation, it can be easier to continuously save.<\/li>
- Invest to lock in savings.<\/strong> When you see cash sitting in your account, it can be tempting to spend it. By locking your savings into investments, the temptation can be eliminated. In addition, you\u2019re earning money on your money by making the choice to invest. Just make sure that you have some cash handy for emergencies.<\/li>
- Reassess your finances routinely.<\/strong> Income and expenses change which means your budget will change too. You should also take a moment to reassess costs and cut out what you don\u2019t need. This is also an excellent opportunity to reflect on your progress.<\/li><\/ul>
Compare savings accounts<\/h3>
If a registered savings plan isn\u2019t the right fit for you now, consider getting a high interest savings account instead<\/a>. Compare features of savings accounts available in Canada in the table below.<\/p>
\n\n <\/div>\n\n - Set up automatic payments.<\/strong> For some people, \u201csetting it and forgetting it\u201d is the best way to save. It can also be helpful to set up payment reminders to better manage your cash flow.<\/li>
- Create a budget.<\/strong> Determine all your income and expenses, then calculate how much you can afford to save.<\/li>