Registered disability savings plan (RDSP):<\/strong> An account that allows you to save and invest to support a person with a disability. Money withdrawn from an RDSP is normally tax-free; however, you do need to pay taxes on income that the RDSP earns.<\/li><\/ul>Should I start a savings plan if I\u2019m still paying off debt?<\/h3>
There\u2019s a clear tradeoff or balance that occurs between paying debt and saving \u2014 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.<\/p>
The earlier you start saving, the easier it\u2019ll 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. Here\u2019s a helpful roadmap for how to tackle savings while you\u2019re paying off debt:<\/p>
Step 1: Build a starter emergency fund<\/h4>
A good strategy is to first build up a smaller emergency fund of at least $1,000 or up to one month\u2019s expenses before you start paying off debt. The idea is to make sure you have enough money saved up for smaller emergencies, so you don\u2019t have to fall back on credit cards or payday loans while you\u2019re in the process of paying off debt.<\/p>
Step 2: Pay off any high-interest debt<\/h4>
After you have your starter emergency fund, start paying off high-interest debt, which are debts that typically charge interest between 9% and 30% (like credit card debt). The rationale is that high-interest debt costs you the most amount of money in interest charges, so by paying it down first, you\u2019re saving money in the long run.<\/p>
Step 3: Grow your emergency fund<\/h4>
After you\u2019ve paid off your high-interest debt, it\u2019s a good idea to build up your emergency fund. A good benchmark for a solid emergency fund is at least three months\u2019 worth of expenses. The reality is, bad things happen to everyone. If you were to lose your job, for example, a larger emergency fund can prevent you from plunging back into the debt you just paid off.<\/p>
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>
Need help figuring out how much to save? Check out Finder\u2019s savings calculator tool.<\/a><\/p>How does the 50:30:20 rule work?<\/h3>
The 50:30:20 rule is a savings strategy that helps you manage your money by dividing your after-tax income into three main categories.<\/p>
- 50% is for needs.<\/strong> 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.<\/strong> 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\u2019s considered non-necessary falls into this category.<\/li>
- 20% is for savings.<\/strong> 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 divvy 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>![\"Example](\"https:\/\/www.finder.com\/finder-us\/wp-uploads\/sites\/5\/2019\/08\/CAFSA_-Example-of-the-50_30_20-rule-savings-plan.png\")
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Example: How does the 50:30:20 rule work?<\/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>
What is a good savings plan?<\/h3>
A good savings plan is one that aligns with your income, expenses and financial goals while being realistic and sustainable over time. It typically involves setting clear objectives (such as building an emergency fund), following a budgeting framework like the 50:30:20 rule and automating regular contributions to a registered savings plan like a TFSA or RRSP.<\/p>
Beyond a registered savings plan, it\u2019s also worth considering opening a high-interest savings account<\/a> for easy access to a portion of your emergency fund. These accounts\u2019 interest is a great way to make sure your emergency fund continues growing while it\u2019s sitting there ready to be used. Peruse our list of the best banks in Canada<\/a> or compare features of available savings accounts here:<\/p>