Studies show that one in four Canadians expressed worries about their retirement and personal finance goals in 2022, with many lost on what exactly to do with their money.
Amid a myriad of different retirement account types, investment options, and budgeting needs, Canadians are more and more apprehensive about saving up for the future, and especially so when it comes to taking the first steps.
Today, I’ll be providing you a short step-by-step guide on how you can begin to prioritize your personal finances and take charge on creating your retirement. These steps are meant to be followed in order, and further details on some concepts can be found in the links provided.
Step #1: Budget and reduce expenses
Your first step is to build a monthly budget to get a sense of your cash flow situation. Are you net positive at the end of every month? Are you living paycheque to paycheque? Identifying sources of income and expenses will help you prioritize what is necessary, like rent, utilities, groceries, etc., versus non essentials and luxuries that can be cut.
Step #2: Repay high-interest debt
Credit card debt is absolutely toxic, with interest rates of up to 19.99% in some cases. If you find yourself in this situation, make sure you pay beyond the minimum payment. You can also look into consolidating the debt with a lower interest card or line of credit.
Step #3: Establish an emergency fund
Life isn’t always predictable. A layoff, medical emergencies, or a natural disaster can impair your earning potential for a significant period of time. For that reason, you should establish three to six months of living expenses in a a High-Interest Savings Account (HISA) for an emergency fund.
Step #4: Contribute to employer matched retirement funds
If your employer offers a defined contributions retirement plan, contribute the amount necessary to get the full employer match, nothing more. This is literally free money and sometimes up to an instant 100% return on your investment, so make sure you take advantage of this.
Step #5: Save for large purchases
Looking to put a down payment on a home? Fancy buying a new car? If these purchases are fewer than five years away, you should put the funds in either an HISA or a Guaranteed Investment Certificate (GIC) with a maturity matching when you need the funds (e.g., three-year GIC if you plan on buying in three years).
Step #6: Open a brokerage account and invest
Open a account at one of Canada’s many brokerages and contribute to either your Tax-Free Savings Account (TFSA), or Registered Retirement Savings Plan (RRSP), depending on your income bracket. Buy a low-cost exchange-traded fund (ETF) portfolio of stocks and bonds matching your risk tolerance, investment objectives, and time horizon.
