There are volumes of information out there explaining every aspect of Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs). Articles on how to optimize your contributions to each based on your tax bracket and expected future earnings, details of the TFSA over contribution rules and penalties, why the age of 71 is a big deal for your RRSP…. and plenty more.

We like getting the facts, but this information overload isn’t much help if you are simply wondering, “what is an RRSP account?” or “what does tax-free saving really mean?”. The mountain of details available is not only confusing, it may also discourage you from investigating more — and that would be a huge mistake!

Everyone should be aware of three things about RRSPs and TFSAs:

1. They are free to open and it’s not difficult to get one.

2. The TFSA age limit is 18, but there is no minimum age for an RRSP.

3. The younger you start, the more money you are going to make.

The biggest RRSP/TFSA mistake is procrastination; it has nothing to do with the minutiae of the TFSA rules or which investment fund is best for your RRSP. Do not put off getting your TFSA and/or RRSP until you are “older” and/or “have more money” — and don’t think these accounts are just for your retirement fund. You will definitely get older, but having “more” money is a pretty vague goal and that situation many never materialize. Keep reading this article to learn the essential facts, but make sure you put your newfound knowledge into action.

While TFSA and RRSP both have "savings" in their name, they are actually designed for investing your money, not saving cash.

After you put money into a TFSA or RRSP, you should be investing it, not just letting the cash sit there. Inflation will eat away at your cash pile over the years, so you need to invest to fight back against inflation and grow your retirement investments. Fortunately, you have a lot of options for investing your money.

Most Canadians invest the money in their TFSA and RRSP in some type of funds (mutual funds or exchange-traded funds) as part of their retirement savings plan. These funds are basically a basket of different stocks, bonds, and other financial instruments — there are thousands of funds available. Some are broad-based and include many companies across multiple industries, while others focus on a particular industry or region. The risk varies greatly from one fund to the next and you will need to factor your risk tolerance into the funds you choose.

Funds are professionally managed and you need to be wary of the built-in management fee (called an MER), but they make it easy for anyone to get invested. You don’t have to pick individual stocks and you don’t need anyone to help you if you want to do it yourself. Many Canadians handle their own investments and there are number of online options to self-manage the funds you hold in your TFSA or RRSP. There are also "all-in-one funds" with varying degrees of risk that are very convenient for beginning investors. There is even a fully automated online option called a robo-advisor that continuously adjusts the funds you hold to match your financial situation and goals — all you have to do is deposit the money!

While you don’t need a financial advisor to choose investments that are right for you, you are responsible for learning the basics of investing and making sure you understand the risks involved, regardless of whether you do it yourself or seek professional advice.

No one should be discouraged from opening a TFSA and/or RRSP because they only have a "little bit" to spare, and it wouldn’t seem to make much difference.

The first argument against this belief is that building a savings habit requires the right mindset and is a skill you need to practice. No one is born with a genetic predisposition to savings. You may be influenced as a child by the savings habits (or lack of) from those around you, but getting into the habit early will get you started down a very long, profitable road due to the wonders of something called ‘compound returns’.

Investing $200/month from age 18 to 65 at a 7% return (compounded for 47 years) in your TFSA would give you $790,139 tax-free at retirement. The same $200 invested with the same 7% return from age 28 to 65 (compounded for 37 years) would yield just $384,810. Sure, you would be contributing $24,000 more over those extra 10 years, but your nest egg when you retired would be almost double.

A lot of young people get discouraged by the sheer amount you are allowed to contribute — and for good reason! If you make $60,000/year, your annual contribution maximums are $6000 for your TFSA and around $10,800 for your RSSP. That’s $16,800; a pretty big chunk of your take home pay! The good news is that your yearly contribution limits can be carried over and as you grow older (and theoretically have more disposable income) you can catch up.

There is no need to choose between and RRSP or TFSA.

As your financial situation grows and changes you can definitely benefit from having both. The main reason is that the timing and impact of the income tax benefits is very different.

In short, you delay paying tax by putting money into your RRSP. When you fill out your tax return, you get to deduct the money you put into your RRSP from income — and that will result in a very noticeable reduction of your income taxes for that year. The higher your tax rate, the more you will save! However, before you go out and spend these tax savings, make a mental note that you are only delaying or deferring that tax to later in life.

Your RRSP should grow substantially over time if you are invested. However, you need to make sure your retirement budget reflects the fact that any money you plan to take out of your RRSP down the road is fully taxable in the year it is withdrawn. The primary advantage is that if you are retired, your income and associated tax rate could be substantially lower than when you were working. This will reduce the impact of taxes, but only to some degree! A lot of retirement advice focuses on maxing out your RRSP, but this could create a hefty tax bill if your retirement income is high.

If you had put the cash into a TFSA instead of an RRSP and invested it the same way, you would have the same amount of money, but you would be able to take it out and spend it tax free. You would have received no reduction in your taxes when you put the money into your TFSA, but you don’t have to pay tax on that money when you take it out of your TFSA.

An RRSP will put more money in your jeans today than a TFSA because of those immediate tax savings, but the opportunity to invest and grow tax-free money for the future in your TFSA is also very attractive. There are lots of other considerations (flexibility of withdrawals & your tax rate for example), but we will leave that debate for another article, just get one, or both accounts, and get started!

It is relatively easy to get started. The TFSA age limit is 18 but there is no minimum age to open an RRSP.

Both accounts require a social insurance number to open. You can open them in-person or online at most banks, credit unions and investment brokers. There are no fees to open one, although some institutions require a minimum balance. Both the TFSA and RRSP are a type of "registered account" and are not used for daily banking. They differ from your savings or chequing account because the cash flowing in and out is tracked to make sure you follow the rules and the tax implications can be managed.

You can put funds into an RRSP and TFSA anytime throughout the year, but there are annual limits.

For a TFSA, the amount is the same for every Canadian regardless of their income. For 2022, the maximum contribution limit is $6000. For an RRSP, you can put away up to 18% of your income up to a maximum of around $28,000.

If that sounds like way more than you can spare, the good news is that you can carryover unused contributions and catch up later. In fact, if you are over 18 and are just now eyeing your first RRSP or TFSA, you already have unused TFSA contribution room available. You may also have some RRSP contribution room as well depending on your income. You can confirm these amounts on your most recent income tax assessment. Just remember that catching up on contributions will be harder than you think and as we already mentioned, your nest egg will have less time to grow.

Although you can contribute funds anytime during the year, there are some deadlines for tax purposes. For an RRSP, you need to get the money deposited (not invested!) by the end of February in order to claim a RRSP deduction on your taxes for the preceding year. If you miss the deadline (even by a day) you will have to wait until next year to reduce your taxes. For a TFSA, the official deadline is December 31, but since the contribution limit can be used in any subsequent year and there is no tax deduction, there really is no deadline. There are also penalties for overcontributing to either your TFSA or RRSP, so make sure you understand the rules.

Even if you are not forgetful, it is a great idea to set up your bank account to automatically transfer a fixed sum every payday into your TFSA and RRSP. You can’t spend what you can’t see, and it will force you to save. You also won’t have to run around like a lunatic every year trying to find the cash and meet the contribution deadline.

The last thing to know is that TFSAs and RRSPs are not just for saving for retirement.

You can use your RRSP to save up cash for a down payment on a home and then "borrow" up to $35,000 ($70,000 for a couple) from your RRSP to purchase the home under the Home Buyers’ Plan. You do have to repay the borrowed funds over a period of years, but you do not have to pay tax when you withdraw the funds.

TFSAs offer even more flexibility with no tax due on withdrawals and you get to keep your contribution room. If you don’t know how much to save for retirement, maxing out your TFSA every year is a good place to start. If your plans change and you need that money before retirement, it is available. You do have to wait one year before you can replace any of the funds you took out so be careful, there are penalties if you run afoul of the rules!

There is a lot more that can be said about TFSAs and RRSPs but the short story is, if you don’t have one, you are seriously missing out. It’s time to get moving!

We often hear the mantra, “pay yourself first” when it comes to financial advice. This concept of automatically routing some of your salary every payday (before you can spend it!) into an investment account like a TFSA or RRSP isn’t hard to understand, but it’s hard to implement if you need every nickel just to survive until your next paycheque.

Discipline and dedication to the cause will help, but they are only part of the savings solution. The fact is that to succeed at saving in today's world, most of us will need to earn more and spend less.

It’s obvious that a higher income will help you mow down expenses and leave you with more money in your jeans at the end of the month. However, any size paycheque will go a lot farther when supplemented with restraint and monitoring to control expenses at their source... before they vacuum up your potential savings.

Making more money is often the preferred approach as cutting back on spending can be painful, but there are definitely some drawbacks. More income means more taxes and it may also lower benefits like your GST rebate or CCB benefits. If your tax rate is around 20%, an extra hour at $15 hour will have the same effect as cutting about $12 from the household budget.

Working more will also rob you of precious free time, so there are significant social costs as well. If you have to incur additional expenses such as a babysitter or dining out more because you have less time or energy to cook, those costs need to be factored in as well.

Perhaps the biggest problem with working more is the very strong tendency to spend more! This is where discipline and determination come into play — make sure you earmark that extra income for saving and keep your expenses at the current level. Making more money won’t solve your problems if you don’t monitor your expenses, make poor spending decisions, delay investment planning, and have no goals to help motivate you and measure your financial progress.

You should also look at your debt cost to see if you should be saving in the first place! If you carry a credit card debt for example, you should definitely be throwing everything you have at it instead of saving. Even with the recent rise in interest rates, you would be lucky to get 4% on cash savings — most credit cards have rates four or five times that figure. You could also invest any extra money, but you have to add in the risk factor, and you would be hard-pressed to get returns that exceed the interest rate on most credit cards.

Turning to defensive savings strategies, there are countless articles churned out every day on how to trim the household budget. They may yield some good tips that are practical for your situation. Look for easy to implement ideas like comparing grocery store prices and stocking up on bargains, collecting points or discounts on a credit card (but paying the balance in full every month!), or clipping coupons.

There is no end to the money-saving ideas and hacks, but the first step is to know your costs. You can’t kill what you can’t see, and household expenses are no exception. You need to track all your expenses for at least a month and analyze where your money is going.

You may find some low-hanging fruits like a lightly used membership you could cancel, or maybe you didn't realize how much those nights out on the town are adding up to every month. On the other hand, you may find the low-hanging fruit is long gone and that making more money is your only way forward! Make sure to track your expenses first and give yourself a realistic starting number before you dive into a more austere budget.

For life’s necessities and things we need to survive, there is no need to ward-off the temptation to spend. We can focus on straightforward techniques that work for our situation and allow us to get the items we need at the best price, whether that’s clipping coupons or visiting a few different supermarkets to get the best deals for your weekly food shopping.

However, even the tightest of budgets include some discretionary spending and that is where some alternative strategies for spending less come into play that are quite different from the simple tips and tricks we see every day.

For example, maybe your “go-to” coffee shop has a stamp-card type offer where you buy ten and get one free. Rather than focus on that future free one, maybe some other thoughts would help you skip that coffee altogether? You could try mentally calculating the cost of your take-out coffee habit into time spent working, or simply pause to ask yourself, “do I really need it, or just want it?” You could also remove the temptation altogether by making coffee at home, taking a route that doesn’t pass by the shop, or throwing away their stamp card altogether.

For discretionary spending in particular, psychology is an important aspect when it comes to controlling urges. Spending can be triggered by a number of factors that affect are psyche — advertising and social media; comparing to our friends, neighbors or colleagues; habitual behaviour; lifestyle creep; the pursuit of happiness.

While it may be possible to limit your exposure and/or do your best to ignore these types of influences, there are financial self-control strategies that can really help put the bite on spending. A lot of personal finance research has focused on these tactics and the summary below has some practical ideas you could start using today.

• Avoid tempting people, places, and activities (restaurants, malls, online browsing)
• Eliminate spending temptations (e.g. make your own coffee/meals at home)
• Use a shopping list and stick to it
• Make regular savings automatic (set up payday bank transfers)
• Set financial goals, track savings, and use a budget or conscious spending plan
• Make funds difficult to access (lock or limit credit/debit cards)
• Always consider your long-term financial goals (retirement, kid’s education, buying a home)
• Reconsider your needs versus wants — we all did without many “needs” during the pandemic!
• Use a “cooling-off” period before making a major purchase
• Rely-on others for support and self-control (spouse, partner, friend, relative)
• Convert the cost of an item into time spent working to earn that money
• Choose to pay now rather than pay later or installment options
• Use a retirement savings projections plan to understand how your current spend affects that plan.
• “Lock” your savings away using term-deposits or registered accounts like an RRSP
• Save before spending and not vice-versa
• Always consider the reasons for your financials goals (family, retirement, etc.)
• Use rewards for self-motivation (e.g. reward yourself with a take-out lunch after 20 days of brown-bagging)

At the and of the day, it doesn’t matter whether you save money through self-analysis and careful justification of spending decisions, or by picking up a sale-priced, jumbo size can of coffee and firing up the kitchen coffee maker every morning... whatever works for you!

Rising inflation and higher prices don’t appear to be a short-term trend, so now is the time to dig into your financial habits and maybe add a little anti-spending psychology to your mental money game.

Finding the cash to move from a paycheque-to-paycheque existence to a situation where you are saving and investing is becoming increasingly difficult these days. More income will certainly help, but you will also need to continuously manage your expenses and make smart buying decisions to really pile up the savings.