For many of us, the COVID-19 pandemic has been a time of changes: work, school, travel and our social lives have all been disrupted and while events continue to evolve, the only certainty these days may be…more uncertainty. What has also changed may be our finances. We may have saved more money than usual over the course of the year as we’ve cut down on commuting and entertainment, and have delayed large purchases.
If you’re seeing money accumulate in your savings account, you’re not alone. According to Statistics Canada, Canadians spent the early pandemic months redirecting cash to their savings accounts: The amount of after-tax income going to savings accounts skyrocketed to 28.2% in April, May and June, compared to just 3.1% in the same period last year.1
What should we do with the money we’ve saved? It may not be doing you any favours to let it just sit there. While watching your money accumulate in a savings account may bring you comfort, there may be other plans for your money that could put an even wider smile on your face. Fortunately, there are many great ways to get your new-found savings working for you and help you achieve some of your financial goals sooner. Here are four things you can do with that cash that may bring greater returns than your savings account can offer.
Pay down debt
When economic times are unsteady, carrying a big debt load is something to avoid. You never know when you may need extra money. If you want to lower your debt load, start with paying down high-interest debts like credit card balances. The interest charged on credit card balances may be higher compared with other loans, so paying those off quickly — and vowing to always pay your credit card bill off monthly — can be a good habit to start now.
Once those are paid down you may move on to other goals, such as your mortgage. An additional mortgage payment during this time can help you become mortgage-freesooner. And paying down home renovation bills or car loans can help you feel like you are in control at a time when events seem a little chaotic.
Invest through a Registered Retirement Savings Plan (RRSP)
Getting your money to grow for you means aiming your investments towards a goal. These could include retirement at a certain age or with a certain amount of money in mind. One of the best methods for retirement goals is investing through an RRSP, which allows your investments to accumulate on a tax-deferred basis over a long time period until you withdraw the funds. Your contribution can also lower your annual taxable income. For 2020, the annual RRSP contribution limit is 18% of your income or$28,830, whichever comes first. To get the most out of your RRSP, you can consider investing in mutual funds which are managed, diversified investments that can contain a mixture of stocks and bonds.
Invest through a Tax-Free Savings Account (TFSA)
A TFSA also has tax benefits but may be better suited for shorter-term goals like saving for a renovation, a car or a vacation. Funds inside a TFSA are not taxed as they accumulate nor when they are withdrawn. While there is an annual limit on how much you can contribute to a TFSA each year (currently $6,000), unused room is carried forward and may be used later. Investing in mutual funds within a TFSA may be an option for those able to handle the risks and looking to see their funds grow. You can hold both an RRSP and a TFSA if you have a variety of investment goals.
Invest in a Registered Education Savings Plan (RESP)
Post-secondary education can be costly and, if you have more than one child headed to university or college, the tuition fees can be daunting. The RESP program was developed to help you meet these future costs toward your children’s education goals, starting as soon as they are born. There is currently a lifetime contribution limit of $50,000 per child annually but the government can match contributions up to $2,500 each year through the Canada Education Savings Grant (CESG). If you missed contributing last year, you can use your savings to contribute and still receive last year’s grant because the CESG can be carried forward one year. Again, mutual funds are one investment option that can help you accumulate funds for your child’s education.
If you happen to have saved some money during this time period, congratulations. However, now may not be the time to sit back and admire your bank account. You may want to look beyond the horizon and consider the next smart thing you can do with your money right now to benefit further down the road.
- “Current and capital accounts – Households, Canada, quarterly,” Statistics Canada, Sept. 14, 2020, accessed Sept. 23, 2020, www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610011201 ↩