It’s time of the year to think about what to do with your extra cash (that is if you haven’t spent all your bonus already). So where should you put your savings?
Disclaimer: I am not a financial professional, so please consult with your financial planner to figure what’s best for you!
Paying off debt
In general, if you have extra money and have high interest debt, you really should pay off those debts first. The average credit card has interest rates upwards of almost 20% – can you imagine someone else paying you extra 20% for no reason?
Emergency Fund
After paying off high interest debt, it does get a bit tricky depends on your circumstances. Do you have an emergency fund right now? If not, you may want to save some of the extra money towards an emergency. General rule of thumb is to have about 6 months worth of expenses put aside. You can even put this savings into a high interest savings TFSA account, so that any interests you received don’t have to be taxed. Ratehub has a handy tool to see what all the interest rate offerings are across different financial institutions. One thing to note though, is that TFSA has a contribution limit, and that may be an issue if your expenses are higher.
Alternatively, some people choose to use a low interest line of credit as an emergency fund. The benefit of this is that you can make other uses of the cash that you have, potentially providing you better returns. Especially if you chances of needing an emergency fund is quite low, and you are able to secure a low interest rate line of credit – remember, you don’t get charged interest until you use the line of credit!
What about RSP?
You can also choose to contribute to a RRSP, especially if you will get a tax return, and then put the returned money towards something else. This way, you can start growing your retirement portfolio early on, and still have some cash that you can decide what you want to do with.
Do note though, that typically a RRSP will be worthwhile if you are currently in a higher tax bracket than when you return, thus when you withdraw from your RRSP during retirement, you should be paying less taxes.
Lastly, if you’re like us with children, you may want to use the cash towards the RESP – since the government will match 20% for the first $2500 each year with the Canadian Education Savings Grant (CESG) with a total lifetime limit of $7500- and I always tend to prioritize free money.
To close, the point of this post is to have you start thinking about what you want to do with some of the extra cash you might have – or to not miss the RRSP contribution deadline of March 1st if that is what you chose to do.
Here’s other links to articles:
https://www.moneysense.ca/save/everything-you-need-to-know-about-rrsps-tfsas-and-resps/
Her Finances 