Saving For A New Home

By Laura Morris

When you start saving money for big purchases like a new home, you may feel like you're miles away from achieving your financial goal.

Fortunately, you are not alone. Saving money isn't easy for many people, explains Matthew Ardrey, a certified financial planner at T.E. Financial in Toronto. However, there are several ways to help keep your savings plan on track.

Pay yourself first

"The first thing you want to do is treat your savings like an expense, but instead of paying somebody else, you pay yourself," Ardrey says. This system forces you to save. Money allotted for savings is electronically deducted from your account every month or each paycheck, before it can be spent.

"If you spend your money first and try to save what's left, traditionally it doesn't work," Ardrey says. Many people don't account for every dollar spent and it's very easy to spend those extra dollars on things like clothes or going to restaurants.

Decide what you're saving for

Secondly, decide what you're saving for. This will help you choose where to put your money. For instance, Ardrey doesn't recommend the stock market for those who are saving to buy a home. "Investing in equity is a more long-term decision," he says. You need the time to ride the ups and downs of the market. If you're saving for a home you're typically planning on purchasing it within a couple years.

However, first-time homebuyers can take advantage of the Home Buyer's Plan. This program allows you to withdraw up to $20,000 of your RRSPs per person when you purchase a home. "You get the extra bonus of the tax deduction when the money goes in," says Ardrey. Although, the money has to sit in your RRSPs for at least 90 days and you'll need to repay that money within 15 years.

Choose a savings account and more

If you're not a first-time homebuyer, where should you stash your short-term savings? Ardrey suggests placing your money somewhere that's easy to access and offers a good rate of interest.

He personally uses the ING Direct investment savings account, because it typically offers higher rates of interest than traditional banks and the money isn't locked in. The interest is about 2.5 to 3 per cent depending on rates. Another institution that tends to offer higher savings is the online bank, PC Financial.

If you have an extra $1,000 on hand, you can park your money in a GIC as another alternative. "At the end of the year, you get back your principal, plus the interest," says Ardrey. However, you are locked into a rate, which could be good or bad depending on the current rates.

"If you're saving for your retirement the RRSP is a great option. The biggest benefit of the RRSP is the tax deferred growth of your investment," he adds.

Start saving today

Most importantly, don't wait for a rainy day to start saving, especially when it comes to retirement.

"The earlier you can start putting money away, the better off you are because of compounding interest," says Ardrey.

Let's say you're 25, making $30,000 per year and saving 10 per cent of your pre-tax income each year. If you increase your savings with the inflation rate and receive a return of 7 per cent from RRSPs, when you're 65, you'll have over $1,000,000.

Start small

Of course, if you can't afford the 10 per cent, try 5 or 3 per cent to start and then increase it over time. Even a small savings can make a difference. If you save $50 biweekly, that's $1,300 in one year. "Most people wouldn't even notice that, and that's a vacation for them," says Ardrey.

Perhaps, your financial goals are closer than you think!

More Steps to Financial Planning

Some people find it hard to put money away. Ease these problems by adopting a plan. Recognize that no matter how much or how little you make, you can always put some money away.

Make a list on one half of a sheet of paper with your income(s).

Make another list beside it with financial obligations, such as: rent, car payments and insurance, groceries, fuel, utilities, gym or membership fees, etc.

Subtract expenses from income.

Determine how much you can reasonably afford to put into savings (usually anywhere between 10 and 20 per cent of your annual income is recommended). Contact your bank and set up an automatic withdrawal for this amount.

Split this amount in half, thirds, or quarters to allot to different savings plans, for example, half to RRSPs and half to a high-interest savings account.

Don't dip into these funds for any other reason than that which you're saving for and always make your regular savings "payments".

- NDH