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Make your savings work hard for you.

Think about short-and long-term savings

When you’re fine-tuning your savings plan, make sure you are saving for both short- and long-term goals. It’s the most effective way to save.

Time is saving’s best friend

Imagine you’re in your mid-twenties, making $30,000 a year. It might be hard to imagine being retired. But the fact that retirement is so far away makes this an ideal time to start saving for it.

For example, suppose Fred opens an RSP when he’s just 25 and contributes $1,000 at the end of every year. Assuming he earns 5% annually, he’ll have almost $121,000 by the time he’s 65.

Simon, on the other hand, doesn’t start contributing to an RSP until he’s 45. Even if he saves double that of Fred every year, or $2,000 each year, he’ll have just $66,132 by the time he’s 65.

That’s about half of what Fred has, even though they both put away the same amount in total — $40,000. Even if Simon triples his contributions for those 20 years he’ll still have less than Fred — $99,200 versus Fred’s $121,000. That’s the power of compound interest. Basically, the longer your money earns interest, the more you accumulate.

Save for the near term too

However, you might also have more immediate savings goals, like taking a vacation or saving for a down payment on a home.

And then there are unexpected emergencies, such as a leaky roof, a broken down car, a sick pet or job loss. If you have savings to draw on, you can avoid dipping into your retirement savings or getting into debt to deal with those emergencies.

How to do it

The ideal way to save money is to make monthly contributions to both a registered Retirement Savings Plan (RSP) and a savings vehicle such as a Tax-Free Savings Account (TFSA). This will get your savings into top shape by focusing on both long-term and short-term savings goals.

It can feel like a challenge to meet both of these savings goals. Here are two techniques that can help:

  1. Deposit your monthly savings into both an RSP and a TFSA. As your short-term (TFSA) savings build up (there is a $5,000 a year TFSA contribution limit), shift the distribution towards retirement savings.
  2. Focus your savings on your RSP. But consider depositing any "bonus" money, such as an income tax refund or payday refund that you receive into your TFSA.

That way, you are saving for both present-day and future needs.

Learn how a two-tier savings strategy can help, and how to start.

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