If saving money is on your mind, you're certainly not alone. According to a recent Scotiabank survey, 70% of Canadians are concerned about not having enough money to support retirement. With pandemic uncertainty, the recent surge in inflation and stock market volatility, finding a savings strategy that works for you can feel overwhelming.
But here's the good news: you don't need big bucks to get started, and saving doesn't have to be complicated. Whether you're saving $100 from each paycheque or rounding up daily debit purchases to the nearest $1 with Bank the Rest®, every little bit counts . And now is a great time to contribute to a high-interest savings account and take advantage of rate hikes.
But how much money should you save? The answer largely depends on your income, lifestyle, and financial goals. With this step-by-step guide, nailing down a target number to sock away can be a cinch.
Knowing how much you need to save starts with setting financial goals. In general, a short-term savings goal is something that you want to accomplish within the next two years. This could include:
- Taking a vacation
- Building an emergency fund
- Paying for a home renovation
In contrast, medium- and long-term financial goals tend to take longer to reach (more than three years). This could include saving for:
- A down payment on a house
- Starting a business
- A child's education
The Financial Consumer Agency of Canada has created a worksheet to help you set short-term (two years or less), medium-term (three to five years) and long-term (more than six years) goals.
Once you've got a clear picture of your priorities, calculate the cost of each goal and a payment plan. What's a realistic pace for hitting that target? For instance, saving a $50,000 down payment within five years means putting aside $10,000 per year.
Often, a goal can seem more manageable if you break it down into smaller payments. For example, saving a $50,000 down payment over five years works out to roughly $833 per month. If you can't afford to do that, you may need to adjust your time frame.
It's also a good idea to revisit your goals every year or if you experience a major life change. Above all, remember that a Scotia advisor can always help you map out a plan to reach your goals.
Next, determine how much you can afford to put away every month for your savings goals. That starts with making a budget – a spending plan that aims to balance your income and expenses. Anything leftover at the end of the month can go into your savings account.
A budget helps you live within your means, save for emergencies and reach your savings goals. One way to set yourself up for saving is to create a fixed payment in your budget to pay for your savings goal – the same way as you'd allocate money each month to bankroll essential expenses.
A simple budgeting strategy is to use the 50/30/20 rule, which allocates 50% of your after-tax income to fixed costs (e.g. housing, bills, groceries, etc.), 30% to discretionary spending (e.g. clothes, entertainment, dining out) and 20% to savings or debt repayment. Scotiabank's Money Finder Calculator can also help identify extra available money that can be funnelled towards your savings goals.
Watch the video: What is a budget?
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Whether it's a flooded basement, a job loss or a broken car, life inevitably throws financial curveballs at us. One way to prepare for these surprises is to park some dollars in an emergency fund – a savings account to cover any unexpected financial challenges .
A general guideline is to save enough to cover three to six months' worth of expenses. Based on your budget, you can estimate how much is needed to pay your fixed expenses, such as mortgage payments, insurance, childcare, groceries, utilities and transportation. Simply calculate the monthly total needed, then multiple by three to six.
You can also choose to save more than six months of expenses to match your situation. For example, you may want to save up to 12 months of expenses if your income is irregular or you anticipate a lengthy job search.
There's no magic number to save for retirement. Figuring out how much you'll need to save depends on diverse factors, such as your age, current income, your target retirement date and your future lifestyle and spending habits. But there are some general rules to guide your retirement savings journey:
Aim for 15%
A general rule is to save 5% to 15% of your pre-tax income for retirement. But striking the right savings balance depends on your income, debt load, financial goals and other factors.
If you can't save that much, aim to save as much as you can, with ambitions to eventually save 15%. For instance, if you're just starting a career, maybe you can only afford to save 3% to 5% – and that's okay. You can boost your contributions later, investing a bigger chunk of your salary as you climb the career ladder. The important thing is to start saving whatever you can now.
Save by age and stage
Another strategy is to break down your savings goals by your age and stage in life. Ideally, aim to save the equivalent of one year's salary for retirement by the end of your 30s. By the end of your 40s, aim to save three times your income for retirement.
|By age 30||The equivalent of one year's salary saved|
|By age 40||3X your salary saved|
|By age 50||6X your salary saved|
|By age 60||8X your salary saved|
|By age 67||10X your salary saved|
Of course, these targets may not be feasible if you're juggling mortgage payments, daycare costs or paying off credit cards. If that's your reality, calculate what percentage of your pre-tax income you can comfortably save, as well as estimate how much you can increase your savings each subsequent year.
Creating a retirement plan is also an important step. This simple retirement calculator can help estimate how well your current savings and future contributions can provide for your retirement, as well as identify any potential shortfalls. For a deeper dive, a Scotia advisor can help you calculate a number that suits your circumstances.
Where should I park my savings?
It depends on your financial goals, savings timeframe and risk tolerance. In general, greater risk brings greater reward. Is maximizing the growth of your investment portfolio a top priority? Can you tolerate the ups and downs of the stock market? Or do you prefer a safe place to stash your cash, even if it means lower interest rates? Here are some tips to help guide your investment decisions:
For short-term savings goals and emergency funds
Using a high-interest savings account to house your short-term savings and emergency fund is a smart move. For starters, it's a safe, accessible place for your money. The Canada Deposit Insurance Corporation (CDIC) insures eligible deposits up to $100,000 – meaning any money you put into a chequing, savings, Guaranteed Investment Certificates (GICs) and other term deposits will be insured. If your financial institution closes, CDIC will reimburse your insured funds (including interest) up to the maximum. A high-interest savings account also allows you to access your savings anytime, often without any fees or tax implications, and typically offers higher interest rates compared to a chequing account. Alternatively, you could put your money into a guaranteed investment certificate (GIC) – a type of investment that pays you a guaranteed interest rate and is considered one of the safest investments you can make. With a GIC, your money is usually locked into the fund for a set term (anywhere between 30 days to 5 years) and you get paid an annual interest rate. However, there's a trade-off for safety: usually, savings accounts and GICs offer much lower interest rates compared to the historic annual returns generated by the stock market.2
Medium- and long-term savings goals
If a savings goal is longer than five years, you may want to consider investing your money in the stock market to maximize growth. Historically, a diversified, risk-appropriate investment portfolio can produce inflation-beating returns;3 whereas savings accounts tend to offer lower interest rates that are usually enough to keep up with inflation. However, the stock market comes with volatility, so expect fluctuating stock prices and bond prices that can affect your annual returns. But if you're years away from cashing out your savings, you likely have plenty of time to recover from a stock market downturn.
What is the relationship between investment and interest rates? As interest rates rise, how does that affect my savings? How do interest rates affect my investments?
The Bank of Canada is raising interest rates to fight inflation.4 As interest rates rise, the cost of borrowing for various loans (such as mortgages) also goes up. But higher rates have a bright side for savers. The Bank of Canada rate hike also affects interest rates paid on deposits, guaranteed investment certificates, and other savings vehicles.5 So you may see interest rates rise on your savings accounts – a boost that can help accelerate savings' growth and reach your financial goals faster.
Ultimately, the amount you want to have saved at different stages of life hinges on your financial goals and having a concrete plan to achieve them. Also, remember that saving for a goal can be fun! For example, you could join the popular 52 Week Money Challenge – a savings quest that involves putting away $1 in the first week and then increasing it by $1 every week. By week 52, you would have $1,378 saved.