You can make saving easy by “paying yourself first” — with an automatic savings plan. Paying yourself first means having part of your paycheque deposited directly into a savings or investment account, whether that’s an RSP, a high interest savings account or a Tax Free Savings Account, depending on your savings objectives. This reduces the likelihood that you’ll spend the money elsewhere, and it allows you to allocate part of each paycheque to your specific financial goals.
As your salary grows, you can increase the amount you set aside, so that the same percentage of each paycheque is automatically deposited. And as you reduce your debt load, you can increase the percentage of your paycheque that is automatically deposited. This allows your savings to keep pace with your financial needs, which are likely to increase over time.
Don’t worry if you can contribute only a small amount of each paycheque. With time on your side, you’ll be amazed at how quickly your savings can grow.
As a student or resident, your retirement is easily 30 or 40 years away. In fact, you probably haven’t given it much thought.
But even though retirement is not top of mind, you should definitely be thinking about contributing to a registered Retirement Savings Plan (RSP). An RSP is one of the best tax breaks available to Canadian wage-earners, and a powerful saving tool.
An RSP provides two main advantages:
- Tax-deductible contributions. You can deduct the amount of your RSP contribution from your income in the current year. A $1,000 contribution will generate a tax benefit of $300 if your marginal tax rate is 30%.
- Tax-sheltered investment earnings. The investment income you earn inside your RSP isn’t taxed until it’s withdrawn. Because the earnings compound tax-deferred, they grow much more quickly than in a non-registered account. And starting early pays off. The more time you have to benefit from the tax-sheltered growth, the more quickly your savings will grow.
There are limits on the amount you can contribute to an RSP each year. For 2011, your RSP contribution limit is 18% of your 2010 earned income or $22,450, whichever is less, minus any pension adjustment if you were employed and participated in your employer's pension plan in 2008. If you can’t contribute the maximum, the unused contribution room can be carried forward indefinitely, increasing the amount you’re allowed to contribute in future years.
In addition, your RSP doesn’t have to be just for retirement — it can also help you buy your first home. Under the Home Buyers’ Plan, first-time homebuyers can withdraw up to $25,000, tax-free, from their RSPs to buy or build a home. For a couple, that can mean $50,000 toward their first home.
Some restrictions apply, and the amount must be repaid over 15 years. If you miss a repayment, that amount will be included in your taxable income for the year.
You may also withdraw from your RSP up to $10,000 per year, tax-free, to a maximum of $20,000 in total, under the Lifelong Learning Plan, to finance full-time training or postsecondary education for yourself or your spouse. The withdrawals can only be made over a maximum period of four calendar years. The amount withdrawn from your RSP should be repaid over a 10-year period.
Committing to a regular savings plan is an important first step toward financial security. But simply saving money isn’t enough. Savings accounts typically pay interest of only 1% or 2% annually. If you want your money to work harder, and grow more quickly, you need to invest it.
Investing means setting up a diversified portfolio with investments in each of the three main asset classes: equity, fixed-income, and cash.
Each asset class has a different purpose: equities provide long-term growth but are subject to short-term fluctuations in value (volatility); fixed-income investments provide regular income payments but may not be guaranteed; cash provides security.
Since you’re just beginning your medical career, growth investments such as equity mutual funds should play a key role if you’re saving for a longer-term goal. That’s because growth investments offer potentially higher returns, and you should have enough time to ride out short-term losses caused by the ups and downs of the stock market.
You also need to consider your level of comfort with investment risk. Growth investments, such as equities, are volatile. While it’s natural to want to avoid risk, with investments, greater short-term risk brings the potential for great long-term rewards. So choose a level of risk that allows you to meet your investment goals — and lets you sleep comfortably at night.