How to save money and reach your financial goals

How to save money: 5 simple steps

1. Set goals and make a budget.

How do you determine how much you can afford to save? This is an important question. Some people start by setting a specific savings target and making that a priority before considering other needs and wants.

Others begin with taking a hard look at their spending patterns to see what they can reduce. This cash-flow worksheet can help you choose your approach.

While either way can be effective, make sure that you set a reasonable target that allows you to cover your planned expenses without going into debt. And, if you have outstanding credit card debt, it makes sense to tackle that first before building up savings.

Once you’ve calculated how much you’re going to save, set up a plan to automatically deposit those savings into for an example an RRSP, TFSA or an employer-sponsored program on a regular basis.

The best part about automating these contributions is that you don’t have to remember to transfer funds each time - it makes it easy to save money. You’re also not tempted to divert the money for impulse or last-minute purchases.

The sooner you begin to save money, the harder your money works for you through the power of compounding returns.

Here’s an example. Maureen and Marla are both age 65 with $500,000 in retirement savings. They both chose the same investment funds, with an average rate of return of 4 per cent. But Maureen’s contributions over the years totaled $260,000 while Marla only contributed $216,000. What accounts for the difference?

Compounding returns are the answer. Marla started contributing $500 per month when she turned 29, while Maureen waited until she was 53 to start saving. Maureen had to contribute $2,500 per month to end up with the same amount as Marla. Getting an early start reduces the pressure to accelerate your savings to catch up later in life.

4. Where should I save money first – TFSA or RRSP?

This question comes up often and the answer depends on the purpose of your savings and your current tax position. If your goal is short-term, the TFSA is an ideal way to save. However, if you want to save for retirement, you could choose either one.

Here’s a good rule of thumb to follow: if you expect to be in a lower tax bracket when you withdraw the funds, the RRSP is the better choice. If your tax bracket in retirement is going to be the same or higher than it is today, opt for the TFSA instead.

Some employers offer group savings plans where they match a certain portion of each employee’s contributions. Others offer opportunities for automatic savings via payroll deductions known as Employee Savings Plans.

Not only do these programs make saving money more automatic, and easier for you, there’s also the benefit of getting the employer’s contribution when one is available. Be aware, however, that these plans may impose restrictions or penalties on withdrawals, so make sure you read the fine print. Look into what your employer offers and to take advantage of it.

If you’re new to saving money for the future, getting started may seem overwhelming. You may not be clear on what your financial goals are or how much you can afford to save. Speaking with a BMO Investment Professional can help you get your plan on track and make progress toward your savings goals.