Q: As a teacher in Ontario with a healthy retirement future, I’m having trouble understanding how to budget for everything else, as many columns are dedicated to those with RRSP investments. In your opinion, how should I be budgeting the rest of my after-tax income? I have recently opened a TFSA investment account, but I’m not sure how much I should be saving for long term vs. short term, if I should have emergency funds, or even how much I should keep in a chequing account! Help! Any tips for a defined benefits worker in her 30s?
A: Great question—and one that is fairly common. Budgeting should be a plan for your spending, as well as for your savings. But saving without a goal can quickly run out of steam, and you could lose motivation.
So start with the basics. Ask yourself what you want to accomplish in the short term (next 24 months), the mid-term (2 to 6 years), and long term (6 years or more). Maybe it’s a new car, a home, travel, or to pay for your children’s education costs. It helps to reverse engineer your thinking by simply asking “what is the outcome I want to achieve”? Then work backwards to come up with an action plan.
If your goal is to have a down payment of $80,000, say, for a house, in five years, then you should save $1,333 monthly for the next 60 months. Of course, not all goals might need that much savings—but the strategy is the same.
Then, you’ll want to automate as much as possible. Set up an auto transfer from your pay account (on payday) to your savings accounts. As well, set up savings accounts that are specific to each goal—one for travel, one for a new car deposit, one for a house down payment, car repair, home maintenance. Free online savings accounts are available at most banks.
As for savings tools, many people aren’t aware that you can have multiple TFSAs—as long as you don’t go over your allowable contribution room. One of your TFSA or savings accounts could be for emergency fund—usually 3 to 6 months of expenses (less if you have other sources of funds for emergencies like job loss, family crisis, car or home repairs.)
Keep enough in your chequing account for your fixed costs like rent/mortgage, utilities, etc as well as for variable costs like groceries and entertainment. Once those costs are covered, allocate the remainder to meaningful goals. Then, set it on automatic and watch it grow. And relax.
Janet Gray, Ottawa-based fee-for-service financial planner and money coach
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