Building a strong financial foundation
If you’re a young adult trying to figure out the money game, you’re not alone. Building a solid financial foundation might seem a bit overwhelming, but it’s all about cultivating some good habits that will pay off down the line. From saving and investing, these tips will help you take control of your finances and set yourself up for a brighter future. Let’s dive in.
Start investing as soon as possible
The sooner you start investing, even with small amounts, the better. Why? It’s all about that magical investing concept—compound interest. For example, if you invest just $100 a month at a modest return rate, you could see it turn into a significant sum over the years. Think of it as earning interest on your interest—a snowball effect for your savings.
Consider these key tools for saving and investing:
Tax-Free Savings Account (TFSA)
This is a great tool if you’re looking to save money tax-free throughout your lifetime. You can put in a certain amount each year (check the annual limit), and any growth or withdrawals are tax-free, within your TFSA contribution room.
- Save tax free for any goal you want (car, home, vacation and even long-term plans like retirement)
- If you take money out, you can re-contribute it the following year, in addition to the annual maximum
- Hold a wide range of investments in a TFSA like cash, stocks, bonds and mutual funds (a TFSA lets you shelter investments that would otherwise be taxed at the highest rate)
Registered Retirement Savings Plan (RRSP)
Thinking long term? The RRSP is your best friend. Contributions are tax-deductible (subject to certain limits), which means you can lower your taxable income. Plus, your money grows tax-deferred until you withdraw it in retirement, when you may be in a lower tax bracket.
- Any investment income earned in your RRSP is tax-deferred until you withdraw it, which helps your savings grow
- The deadline for contributing to an RRSP for any tax year is January 1, but you have up to 60 days after that date to do so
- Minimum age to contribute: as soon as you begin earning income; maximum age to contribute: 71
Tax-Free First Home Savings Account (FHSA)
Dreaming of owning your own home someday? The FHSA allows you to save specifically for that goal. You can contribute tax-free, and when you’re ready to buy, you won’t have to pay taxes on the money you withdraw. It’s a win-win.
- Contributions are tax-deductible (like an RRSP), and withdrawals to purchase a first home are non-taxable (like a TFSA)
- A maximum of $8,000 unused contribution room can carry forward to the following year
- Similar to an RRSP and TFSA, you can hold mutual funds, publicly traded securities, government and corporate bonds, and GICs in your FHSA
- You’re generally required to close your FHSA within 15 years of opening the account
- If you don’t use the money in the account towards purchasing a home, you can transfer it to an RRSP or RRIF (and you don’t need existing RRSP contribution room)
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