My money, she is lazy

[Alys]

I have 11 000 little dólares sitting on their asses- they need marching orders!
I am a Canadian and I live with very few expenses. My saving habits have not been outstanding to this point but I'm working on turning that around. I don't have any debt though and I have managed to squirrel away $11 000- which is sitting in my chequeing account doing nothing.
I don't know what to do with this money.
I only make about $25 000/year after taxes. I will be paying for half a down payment on a modest abode in the next two years so I'm hesitant to lock it into anything. My financial education has been sadly neglected, I have no idea what I'm doing. RRSPs? Tax free savings account? Mutual funds? I'm baffled.
Help?

[EngGirl]

Hey Alys,

Us Canadians have 2 options for sheltering our money from our greedy government. These options are

1) RRSP's - When you choose to put your money under an RRSP, you get a nice fat tax rebate. It's like you never earned that money at all, so the government won't tax you for it. You WILL pay tax on it when you withdraw that money. This option is great for people in a high tax bracket who want a fat refund, and who are planning on using the money for retirement at a standard 65. You can put max 18% of what you have earned into an RRSP.

2) TFSA's - When you put money under a TFSA, you pay taxes on the money (i.e. the money comes out of your normal paystream which you have already been taxed on). However, you pay zilch for any earning on that money. You earnings are sheltered for tax. TFSA's are great for people in lower tax brackets, and people who want access to their money in the near future. You can withdraw from a TFSA at any point without being penalized, and you can re-invest that money next year (you can't do this after you withdraw from a RRSP). You can contribute up to $5500 in TFSA's a year.

RRSP's and TFSA's are both PLANS, NOT INVESTMENTS. They are ways that you can shelter your investments (mutual funds, stock, bonds, whatever) from our greedy government. The major thing that you need to know about investing is that with higher risk comes higher reward. In my opinion, you should never invest in something that you don't know inside and out. For the novice investor, I would suggest starting in safer (lower return) options, because there is less chance that you will bite on a risky investment and lose your money (in a short time frame). I know that many people will disagree here, because they all want to retire in less than 10 years. I personally think it's best to keep your money safe (but not idle) while you learn a little more. I would go for a GIC or a bond for the first year while you spend A LOT of time learning. Then, in one year, when your money has grown a tiny amount, you can shift it to an investment that will earn your more. Whatever you do, don't just keep it in your lazy chequeing account.

I would start out by reading Gail Vaz-Oxlade's "Never Too Late" for a basic lowdown on Canadian retirement. It's easily digestible for the novice investor, and will give you some background. After that, you can begin doing more research, and applying mustachian principles to REALLY start saving!

Good luck! You are already most of the way there by having the discipline to save that much already! Where to stick it is the easy part!

[skarn]

$11,000 is a pretty impressive sum to amass.

If you are buying a place of your own, though, I'd put most of that into the house since more upfront will save you on interest payments in the future.

Otherwise, I'd put it in equities. I don't know anything about Canadian equities, but I hope there are solid big, stable companies around that can be bought on dips and can pay out dividends at a rate that beats leaving the money in the bank. Earning a slice of a business is a great way to start your financial education. Buy it, hold it, don't trade too much. Buy some more when you have a few more thousand dollars. Etc.

[StarswirlTheMustached]

Peoples Trust Company has a 3% Tax Free Savings Account. Follow this elegant and finely crafted link.
There's no risk-- you're guaranteed by CDIC for the first hundred something thousand even if the bank goes under, and that's not something that happens very often in Canada. If it's only two years, I'd just park my money there. 3% is better than any 2-year GIC I've seen (though you could grab a market-linked GIC and hope we have a good run -- and if we don't, the principle stays put). It's still pretty lazy by the standards of more risky investments, but hey. At least you know it's still there when you find the house. Moi, I'd probably stick the whole 'sache into the down payment when you're ready, but I've been told that's silly and you should invest some where it will earn you more than the interest on your mortgage. Which is fine, if you trust those returns to keep up and don't mind waiting longer to own your home free and clear.

One thing EngGirl doesn't mention is that you're able to withdraw from an RRSP to put a down payment on your first home without paying any tax-- but you have to pay that back to your RRSP within some time frame or the taxman cometh. 

[AJDZee]

Hey Alys,

Not sure what you ended up doing with your nice little stach of cash... but I noticed no one mentioned the Home Buyers Plan (HBP) in previous posts.

When you put your money in RRSP accounts, the intention is that it will be parked there until you are retired because any money you take out is taxed. There are a few programs where you can withdraw from your RSPs without being penalized, one of which is the HBP. (it's very popular, if you don't already know about it chances are you would have come across information about the HBP when you got closer to buying a house).

Essentially, you are able to take out money from your RRSP accounts, no taxes taken away, and put that towards the down payment of your home. You have to pay it back in 15 years (i.e. you pay back 1/15th of the amount you borrowed, per year by making RRSP contributions but declaring them as HBP repayments on your tax forms).

It's like borrowing from yourself, no taxes, no interest... the only thing you lose is the gains you would have realized from your investments in the time you are borrowing the money. However, you save the interest on your mortgage that you would have paid, so all is not lost.

The advantage this way is you will get back all the taxes you paid while savings that $11,000. Going by your info above you are in the 20% tax bracket, so next time you do your taxes, the government will help you with the down payment on your house by cutting you a cheque for $11,000 x 20% = $2,200! (and you WILL put that $2,200 towards your savings and not blow it on consumer goods, right??  :)  )

So if you know that money will go towards a house, and you won't stretch yourself so thin that you can't pay back 1/15th of your HBP amount, then this is a good option. I mean... would you rather put down $11,000 or $13,200 by filling out a few forms?

[KMMK]

If you need the money fairly soon to buy a house, I'd try to find a high interest savings account to put it into. Some of our credit unions around here are paying about 1.8%, which is pretty good with the current interest rates for something that's not locked in at all. You can have a savings account within your RSP. I agree with AJDZee that RSP, to get the tax refund and then Home Buyer's Plan is probably the way to go.

I bought my first house with 25% down from my RSPs.