Saving and Taxes

Spending less than you earn is an important skill that we all need.  We all have unexpected expenses, larger purchases that we need to pay for, and we will eventually stop earning money from our careers and live on our savings. 

Recent government proposals for tax changes to small businesses and corporations have raised questions about savings and taxes; some of the proposals seem to punish for saving.  Unravelling the proposed changes, their impact and why you need to save is a process.  Today we’ll start with the savings.

If you are starting a savings plan, there are several steps that I recommend:

Define different types of savings

• Emergency Savings- this amount would cover the cost of sudden income loss, a large home repair, or a series of unexpected expenses.  A good number to start with is 3-6 months of your usual monthly expenses
• Short- Term Savings- this amount would cover the cost of larger purchases that you know are going to happen.  Cars need repairs, houses need maintenance, vacations need to be paid for
• Long- Term Savings- car replacement, retirement, children’s education (this topic has also been covered in Planning for the next educational step - RESP withdrawals)

Ideally, your emergency and short-term  savings will have different locations than your main bank account ie- separate bank accounts, a TFSA, a non-registered investment account.  Differentiating the location helps you to keep the purpose separate (and you are less likely to spend the money on something else). 

Match the Type of Saving to the Type of Investment

Different types of savings need different types of investments.

• The purpose of emergency savings is to have the money available when you need it.  You don’t know when an emergency is going to happen; it’s important that you don’t take risk in the value or availability of the investment.  For example, if you invest your emergency money into a Guaranteed Investment Certificate (GIC); you are locking that money into that investment for a specific amount of time.  You can’t access it earlier.  This is not the purpose of this money.  If you invest your emergency money into a stock or stock mutual fund, for potential higher growth, you are also accepting the risk of short-term loss of value.  This type of investment also doesn’t suit the purpose.  Emergency money is best left in cash that pays you interest.
• The purpose of short-term savings is to have the money available when the expense occurs.  These may be annual expenses, or expenses that occur within 3 years.  Short-term goals often have a desired ‘spend’ date, which like your emergency savings, means that you need the money available when the expense occurs.  This timeline also means that you don’t want to take significant risk in chasing growth on this money.  Cash or a bond fund is suitable in most cases.
• Long-term Savings- we will discuss this area in next week’s blog.

Separating your savings based on purpose has many benefits: organizing your day-to-day cash; ensuring money is available for larger expected purchases and protecting your family and finances in an emergency.

To apply this to your situation or discuss further, please contact Sara at 519-569-7526 or [email protected]