Which Account Should I Add to First?
Once you have started to take control of your emotional expenses you will start to generate cash; instead of letting it burn a hole in your pocket, let’s get it into the right account.
If you do not have an emergency fund, put all extra cash in there until you have reached $1,000
Pay off the smallest debt balance, while still paying off the minimum amounts required on your other debts. Eliminate item by item until you have only your mortgage remaining.
Go back to your emergency fund and deposit funds until you have saved enough to cover 3-4 months of expenses (both fixed and emotional).
Then the fun begins; let’s set up the following investment accounts
Non-Registered Investment Account (Non-Reg)
Registered Retirement Savings Plan Investment Account (RRSP)
Tax Free Savings Investment Account (TFSA)
If you have children, a Registered Education Savings Plan Investment Account (RESP)
While setting up investment accounts, it is also important to design insurance strategies for those just in case moments. Here is a strategy I really like with insurance
Have a term policy that covers off your debt (mortgage, car loan, credit cards) for the next 10-20 years depending on your age and amortization periods.
Have a permanent policy, which means it is in place until the day you die for a minimum amount of $20,000 to cover off final expenses such as funeral costs, last expenses.
Disability Insurance is often the forgotten insurance or we all feel like we have that through our work, however this type should get more attention as your ability to work is your biggest asset.
Since 2/3 people will be diagnosed with a critical illness this policy allows families the safety net of covering expenses if someone in the family needs to take time off due to an illness or the need to care for another family member.
(These are big topics and require posts on their own but I wanted to at least provide you with a brief description of each.)
How do you determine which investment account to fund first? Great question!
If your income bracket is above approximately 30%, your job and lifestyle is currently predictable and you are not concerned about future cashflow, the RRSP would be a great spot for the funds. You will get a tax refund depending on your tax bracket which could be deposited into your TFSA/Non-registered/RESP as an extra boost to your savings strategy or you could save some and use some to treat yourself ;)
If your job or lifestyle are currently unpredictable or you are concerned about future cashflow then hold off on RRSP contributions this year and contribute to your TFSA instead. The reason for this is that the TFSA is flexible, you are able to withdraw funds at anytime without paying tax on the money which keeps you more in control of your options.
If you have maxed* out your RRSP for the year, contribute to your TFSA. If you have maxed out the contribution room in your RRSP & TFSA then deposit funds into your Non-Registered Investment Account.
If you have children, you are able to contribute $2,500 per child per year into an RESP which the government will match with a 20% grant. This means if you contribute $2,500, the Government will contribute $500 into the RESP for the future university education costs of your child. Keep in mind very few children pay for the retirement of their parents so as much as we want to ensure our children are set up for the future, don’t do it at the expense of your own savings and retirement.
*Your maximum RRSP amount is determined by a calculation of 18% of your annual income up to a maximum amount of $29,210 for 2022 unless you have unused RRSP room which you could find on your most recent notice of assessment.
The maximum TFSA amount is eligible for anyone who is over 18 years old as of that calendar year. If you were 18 or older in 2009 you would have total contribution room of $81,500.
The annual TFSA dollar limit for the years 2009 to 2012 was $5,000.
The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
The annual TFSA dollar limit for the year 2015 was $10,000.
The annual TFSA dollar limit for the year 2016 to 2018 was $5,500.
The annual TFSA dollar limit for the years 2019 to 2022 is $6,000.