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Do you know how much of your paycheck should you save? Wondering how to even save in the midst of the pandemic? You're not alone.
Like so many Canadians, Sean Cooper expected 2020 to be a great money-making year. But then the coronavirus pandemic hit and it decimated his bank account. “When looking at 2019 versus 2020, I probably will have lost half my income,” he said.
Cooper is a mortgage broker, money coach and bestselling author of Burn Your Mortgage, a book about how he managed to pay off his mortgage in three years at 30 years old. Even with all his financial experience, he says said the global pandemic has been a brutal lesson in the importance of having savings. “This is maybe a once in 100-year event, but I actually think it’s a wake-up call for Canadians.”
You might have saved your nickels (and pennies for some of us) in a piggy bank when you were a kid – but we often lose that habit when we get older.
Why? Well, life gets in the way. Maybe you’re busy paying off credit or student debt or love having wine with dinner or trying the hottest restaurants. Maybe you have a tendency to waste money. Whatever it is, everybody has done it.
When we’re living our lives, so many of us forget to save for big wants in our future like buying property, having children or saving for retirement. Even fewer of us save for the worst case scenarios and we don’t have to think too creatively to come up with that kind of scenario now that we’ve seen the impacts of COVID-19. Thankfully, saving for both our big wants in life and the worst case scenarios doesn’t have to be complicated.
Happily, our recent study found that 45 per cent of Canadians still made regular contributions to savings in 2021 and that they're saving, on average, 20 per cent of their income, which is in line with what's recommended.
Just like investing in your future, saving is a financial responsibility.
Take it from United States Senator and former candidate for the Democratic Party’s nomination for president, Elizabeth Warren. She famously touts the 50/30/20 budget rule in her book All Your Worth: The Ultimate Lifetime Money Plan. which means that half your income should go to your “needs,” so putting food on the table, paying your rent or mortgage, your electricity bill and car payments. Thirty percent should go to your “wants,” so going out to eat, buying new clothes and your hobbies like pick-up hockey or that yoga membership. The final 20% should go towards savings.
Cooper says those strategies are good in theory, but understands that for someone drowning in credit card debt or who lives paycheck to paycheck, saving a big chunk of money might not be an option. That’s especially true with this pandemic as lower-income Canadians have been more harshly hit and government supports haven’t always been enough.
But then there's those people out there earning a good living that aren’t saving. “I don't really think there's an excuse for that,” Cooper said.
There's no doubt that saving is important, but how much of your paycheck should you save each month? And what about a baby or retirement?
There are a lot of questions around savings and, luckily, we have answers.
Saving involves putting money aside, but this doesn't mean you have to deprive yourself of the odd take-out dinner or fun purchase.
For Cooper, saving for a $170,000 downpayment and to pay off his mortgage meant living “like a student” and not travelling. “I hadn't even like gone on a plane ‘till I was in my twenties,” he said.
But Cooper didn’t take frugality to the extreme. “I certainly didn’t eat Kraft Dinner and I ate healthy and all that,” he said.
For others, especially those who earn a lower income, more sacrifices might have to be made to build up significant savings. But how much is a significant amount to save?
To figure that out, Cooper recommends making a mock budget.
Sit down and think about what you want to save for in the future, be it having children, buying a property or retiring at a certain age. Honestly plan out how much you’ll need for those things without going into debt and then tack on saving for hard times.
“What I do with a lot of clients is look at a worst-case scenario, like what if the car broke down. Think about what would happen what if the roof got damaged and starts to leak or you lose your job? What if all those things happen at the same time? Would you be able to get by with your emergency savings?”
Then, Cooper recommends putting a dollar figure to see how much you’ll need to save. “You don’t have to save that amount the very next month, but just commit yourself to putting a certain amount of money aside.”
For years, the general advice has been to keep up to three to six months of living expenses saved in case of the worst-case scenario like losing your job. “But nobody really anticipated something like a pandemic that would shut down the whole economy,” Cooper said.
As coronavirus drags on and the price of everything from houses to food is going up, the more you can save the better. But Cooper says you don’t need to necessarily put a huge amount aside each month, just so long as you get in the habit of saving something.
“Put the paying yourself first strategy of having the money automatically going to a savings account – even if it's not a significant amount, even if it's like $50 from each paycheck and most of it is going towards debt – [into action]” he said. “I just think that's a good way to get in the habit of saving.”
However, when taking things like subscriptions and critical illness as examples for monthly expenses, saving your paycheck may prove as difficult for regular people.
The finances of someone living paycheck to paycheck and someone making $100,000 per year will look very different. That’s why Cooper doesn’t like to tell people exactly how much they should save.
For a general aim, Cooper says 10 to 15 percent is a great goal, but you’ll be thankful down the line as long as you’ve saved something.
Moneysense estimated that raising a child in Canada in 2011 would cost a whopping $243,660, or more than $12,825 a year. Nearly a decade later, that number has undoubtedly ballooned.
To save for having a baby, use the resources available online and ask friends and family to figure out the expenses – food, diapers, clothes, childcare, the list goes on. Then, add on some more and make a plan. “I would just say create a mock budget and look at the expenses of your household and just make sure that you can afford them on an ongoing basis so that you don't have to go into debt to do something like that,” Cooper said.
How much you’ll need for retirement depends on what kind of retirement you expect to have. Are you just going to be hanging out in a rental in the suburbs or are you planning on going on cruises around the world? Will you be laying low or playing golf as a member of a swanky country club?
“Figuring out what you want your retirement lifestyle to look like is a good start and then trying to put a dollar figure to that for how much it’s going to cost you,” Cooper said. “Then, working backward and figuring out how much money you need to [save] from each paycheck.”
“Doing that exercise of figuring out what your retirement is going to look like and creating a mock budget is definitely a good way to make it more realistic and motivate yourself more,” he added.
Depending on your tax bracket, Canadians saving for retirement might want to save their money through a Registered Retirement Savings Plan (RRSP). Money in an RRSP can then be invested in things like stocks, ETFs or mutual funds to grow over your working years until you retire. Alternatively, you can save through a Tax-Free Savings Account (TFSA), a guaranteed investment certificate (GIC) or a high-interest savings account. The more risky the investment, the longer you should have it invested.
“Five years or longer, that's what I'm looking for to have more potential for growth, like index funds, ETFs mutual funds, stuff of that nature,” Cooper said.
Having the answer to how much of your paycheck should you save doesn't mean your finances are figured out. Now, you have to actively work at being financially responsible.
Set aside some money from your paycheck – it doesn’t matter how much, but 10 to 15 percent would be terrific. Then, do the same with your next paycheck. You don’t want to be in a situation where you don’t have money set aside for the next big step in life or for a worst-case scenario like a job loss.
This pandemic has been absolutely devastating, but if it has the capability to leave us with a single positive, it’s that it might have shown us exactly why it’s so important to save.
“I’ll be curious to see if people make a greater effort to have a bigger emergency fund going forward after learning the unfortunate lesson of the whole COVID situation,” Cooper said. “Things can be great and then in the next week the whole economy shuts down.”
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