How To Make A Budget That Works For You

Feb 18 | Money Saving Tips, Budgeting, Frugal Living

Here are some tips on how you can create a budget that works for you:

Most people have difficulty creating a budget and actually sticking to it. That's because it can get pretty restrictive and time consuming. The good news is, you don't have to make it hard. You can find ways of making a budget that works for you. 

Instead of focusing on your expenses, try instead to concentrate on your savings. This process of reverse budgeting lets you figure out how much you need to save every month. Once you are able to figure this out, you can then set it up so that you have that amount going into your savings account automatically. That way it’s sort of like “out of sight out of mind” and you don’t really miss it or end up using it.

Money Goals

Before coming up with a budget, it's important that you write down your short term goals. Doing this will increase your chances of success. This is because when you write down your short term goals, you'll be able to fully understand the big picture. You get to see what it is you are saving up for and how you can accomplish that goal in the future. 

Start by writing your goals out. You can do this for the next 3 or 6 months, 1 year, or even 5 years or more, it’s up to you what fits your needs. Remember to include the date you want to complete them along with the expected cost. After you have written down your goals, that's when you can determine how much money you need to set aside on a monthly basis. Here's an example:

By simply dividing the cost of the goal with the months you have available to complete the goal.

Cost of goal: $2000
Months to complete goal: 12
$2000 divided by 12 = $166.66
So you need to save $166.66 each month for 12 months to reach that $2000 goal.

The next task is to number the goals by assessing their priority. 

You can also do the same for your intermediate term goals and long term goals. Remember that if you are unable to meet the monthly savings needed to complete your short term goals after figuring out your expenses, you may need to reevaluate the things that are important to you and make necessary adjustments. What you don’t want to do is quit. You want to adjust. You can do this, but be realistic when setting your goals.

Automatic Savings

It is a wise idea to set up an automatic withdrawal from your main account or paycheck that goes directly into your savings account. This way, you won't have to withdraw the money from your bank which can make it tempting to spend on unnecessary items. 

When you're opening a new bank account to do this, make sure that you choose an account that will earn you a higher interest rate. This is because you won't be touching the money for a long period of time. If you let the interest accrue, it means that your funds will grow as long as you leave them in the bank. 

As soon as the account has been opened, and you have your expenses figured out, set up an automatic monthly withdrawal with the amount that meets your goals. Then forget about it.  Use your regular method of paying bills and ignore this new account so that it can grow and not be used as a backup and you’ll be on your way to meeting your savings goals in no time flat.

Trying to make another person’s budget and lifestyle work for you is probably setting yourself up for failure. You have to find something that works for you. Be kind and understanding to yourself. If you fall, get back up and keep going! Just. Don’t. Quit.

How to take money from your RRSP without paying tax

Nov 18 | Money Saving Tips, Budgeting, Frugal Living

Sometimes, you CAN take money out of your RRSP without penalty. But you have to pay your RRSP back – or pay the tax.

This post is a sponsored post written by Sun Life Financial. See my disclosure policy here.

Are you looking at a major expense you didn’t see coming? Short of available cash? Perhaps you’re thinking about tapping your registered retirement savings plan (RRSP). It’s your money, after all, so why not?

Here are three good reasons why not.

1. You’ll owe tax

The first is the tax bill. Since you used pre-tax income when you put money in your RRSP, you’ll have to pay tax when you take it out. And while there’s no tax on investment growth inside your RRSP, you’re taxed when it comes out. RRSPs make sense because you’ll typically cash them in after you retire. That’s when your income and your tax bracket will likely be lower. You’ll still pay tax, but you’ll pay less. If you take the money now, while you’re working, you’ll face more in taxes.

2. You’ll miss out on investment growth

The second reason is lost investment growth. Every dollar you take from your RRSP is a dollar less to build up through compounding. So that little nibble from your plan today could mean a big bite missing from your savings come retirement.

3. You’ll use up contribution room

And the third reason: When you take money from your RRSP, putting it back generally uses up your contribution room. What’s contribution room?  Each year you can put as much as 18% of your earned income from the previous year into your RRSP, up to an annual maximum. The difference between your limit and what you actually put in your RRSP is the unused contribution room. You can carry that forward to use another year. Unused contribution room plus your annual maximum becomes your total contribution room. But whatever you put in your RRSP – replacing a temporary withdrawal or making a brand-new contribution – can use up contribution room. Let’s say you take $5,000 out of your RRSP this year and plan to pay your RRSP back next year. That repayment will reduce your contribution room by $5,000.

There are two ways to avoid paying tax on RRSP withdrawals, without using up contribution room:

1. Use your RRSP to help buy your first home, or
2. Use it to go back to school.

What’s the RRSP Home Buyers’ Plan (HBP)?

Are you a first-time homebuyer living in Canada? If so, you can borrow up to $35,000 from your RRSP to put towards a down payment. If you and your spouse are buying together, that’s $70,000 you could use for your home.

The HBP lets you take out the money tax-free. But there’s a catch: You have to pay it back in equal installments over 15 years. Any year you don’t pay the full installment, you have to pay income tax on the outstanding balance. You’ll also lose the chance for that money to grow within your RRSP.

Thinking of using the HBP? When you’re crunching the numbers, be sure to include the RRSP repayments along with your mortgage payments.

What’s the Lifelong Learning Plan (LLP)?

This is another way to take tax-free money from your RRSP:

• Take out up to $10,000 a year, for a total of
  $20,000.
• You can spread those withdrawals over a maximum of
  four years.
• Use that money for full-time education or
  training for yourself, your spouse or partner. 
  
• As with the HBP, you need to repay your RRSP or
  pay income tax on your withdrawal.
• With the LLP, you have 10 years to repay your
  RRSP in equal installments.

What about the tax-free savings account (TFSA)?

You might need money for anything at all – not only buying a home or going to school. An option is your TFSA. You don’t pay tax on TFSA withdrawals for any purpose. You’ll still lose potential investment growth while your money is out of the account. But your contribution limit will grow back. Whatever you take out gets added to what you can put in the following year. You can pay your TFSA back according to your own schedule.

The Amazing Benefits of Budgeting

Jul 18 | Money Saving Tips, Budgeting, Frugal Living

The Amazing Benefits of Budgeting

Today, I'm going to start out with a few points about the benefits of budgeting.  For those of you that already have a budget set up, this may be confirmation that it is a good thing, but for those of you that don't have a budget, it may present some points that will give you the push to get started.

A Budget Will Help Identify Where your Money is Going

First and foremost, a budget will allow you to identify where exactly your money is going.  You'll see just how much is going towards bills, clothing, entertainment and everything else you spend your money on.  This is important to know if you want to gain any sense of control over your finances.

A Budget Will Help you to Control Your Money

Once you have identified where your money is going and you make a budget, you may be some hard choices to make at first. Maybe you realize you need to move to a more affordable house. Or maybe you discover that drinking a Starbucks latte everyday is keeping you from taking your dream vacation.  It can be hard to accept that you can’t have it all. But once you get past that point and realize that by cutting a few expenses here, can allow you to spend more over there, budgeting doesn't seem so bad. It allows you to prioritize what is important to you, and then live by those priorities.

A Budget Will Help Guide you in Planning Financial Goals

A budget is a plan.  A plan for where you want your money to go.  Say you want to do a bathroom renovation next winter.  Unless you plan to set aside money every month, you won't be doing that renovation. (Unless of course, you take on debt.)  Without a plan, the money can too easily be spent on $100 trips to the mall.  Having a budget helps you to plan and stick to your financial goals you hope to achieve.

A Budget Will Help you Prepare for Emergency Expenses

Having a budget will allow you to allocate money to an emergency fund for those unexpected situations that are bound to arise in your lifetime.  A broken furnace, vehicle repairs, or an unexpected trip to visit an ill relative, to name a few.  When you don't have a budget, it's easy to forget about those extra expenses that will most likely arise at some point in the year.

A Budget Will Help Give you Peace of Mind

Having a budget is what ensures you'll have enough to pay your expenses.  Since you've set aside money for your day to day expenses, annual property taxes, income tax, emergencies and what ever else you know is necessary in your life, there's no need to stress or loose sleep.

A Budget Will Help you Feel Less Guilty about Spending Money

Once you start budgeting and tracking your finances you might find that you feel less guilty about spending money. Knowing that you have set aside $75 a month for clothing, for example, you don't have to feel badly about spending it all or a portion on a pair of shoes that you fell in love with.  When every dollar has a purpose, you can feel much better about spending in general.

Having a budget is freeing, because you make the plan. It’s customized to your needs and wants. It’s also not set in stone. If you find that you miscalculated when you set the food budget, readjust. That’s the beauty of it. It’s your budget. Your money, working for you!

What are some other benefits of budgeting?  Do you have any stories to share about how budgeting "saved" you?

How to Choose the Right Retirement Savings Account

Jul 6 | Money Saving Tips, Budgeting, Frugal Living

This post is a sponsored post by Sun Life Financial written By Brenda Spiering. See my disclosure policy here.

Saving for retirement is likely one of your top financial priorities. But did you know that how you save can be nearly as important as how much you save?  Choosing the right retirement savings account can have a huge impact both on how much money you save and how much tax you pay. So, how do you choose the best type of account?

How to choose the right retirement savings account

 When to choose an RRSP

When it comes to saving for retirement, RRSPs (Registered Retirement Savings Plans) are pretty hard to beat. Contributions are tax-deductible, investments grow on a tax-free basis within the plan, and RRSP  funds aren’t subject to tax till they’re withdrawn from the plan.

If you expect your current income is going to be greater than your income in retirement, an RRSP is a great option. It will provide you with a tax deduction that can help reduce your current income taxes. Plus, if you’re in a lower tax bracket when you draw the money out, it can help reduce the overall amount of income tax you pay.

When to choose a TFSA

TFSAs (Tax-Free Savings Accounts) are a great retirement savings account option if you’ve maxed out your RRSP. While you won’t get to claim your contributions as a tax deduction, the investment growth is tax-sheltered and there’s no tax payable on withdrawals.

The fact that withdrawals from a TFSA are not subject to income tax also provides an advantage if you expect your income in retirement to be greater than your current income, since TFSA withdrawals do not reduce income-tested benefits like old age security benefits. Also, unlike RRSPs that you can no longer contribute to after Dec. 31 of the year in which you turn age 71 (or, in the case of a spousal RRSP, the year in which your spouse turns age 71), you can continue to contribute to a TFSA as long as you wish.

How much can you contribute?

Both RRSPs and TFSAs have contribution limits. In the case of RRSPs, you can contribute up to 18% of your previous year’s earned income up to the maximum limit set each year by the Canada Revenue Agency (CRA) ($26,230 for 2018), plus any unused contribution room carried forward from prior years.

Since 2016, the annual maximum contribution limit for TFSAs has been $5,500, however, you can also contribute for any past years in which you didn’t contribute, back to 2009 when TFSAs were first introduced. If you’ve never contributed before, you’re currently eligible to contribute a maximum of $57,500.

A great way to determine how much you need to save for retirement is to use a Retirement Savings Calculator. It can help you set an annual savings goal based on your current age, expected retirement age and desired income in retirement. Plus, it can show you the impact of contributing to different types of retirement savings accounts.

To learn more about smart ways to save for retirement, sign up for the Sun Life Saving for Retirement email series.