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Saving Tips
Saving Tips

Tax Tips for Freelancers and Entrepreneurs

I’ve had to claim income from Money After Graduation since 2011. Initially, I worked as a sole proprietor and claimed my freelance and blog income as “other income” when I filed my personal income taxes. In 2015, I incorporated my company and put myself on my payroll, which meant now I issued myself a formal T4 for tax time. While I let an accountant handle my business income taxes, I still choose to file my personal income taxes myself.

I love being self-employed and in charge of my income, but I will admit, it takes even more discipline and attention to detail to manage my business finances on top of my personal finances. However, over the years I’ve found the systems and strategies that help keep me organized and avoid any extra stress at tax time. Here are some of the ways I handle my business finances:

Dedicate a specific bank account to your business finances

The most important thing you can do as a freelancer or business owner, is separate your business finances from your personal finances. Open a business bank account and make sure all business-related income and expenses run through this account. Because you can’t claim personal expenses as business expenses, it’s imperative that you always know which is which. Keeping your business and personal finances separate makes it easier to manage both, and avoids any potential negative findings by Canada Revenue Agency in the event of an audit.

Use spreadsheets or software to keep track of income and expenses

Depending on the size of your business, you might be able to keep track of all your business finances in a spreadsheet. You want to keep a detailed record of income and expenses, and regularly verify that these amounts are correct by comparing them to your business bank statements.

I pay for bookkeeping software that integrates with my business bank accounts to manage my day-to-day business finances. Not only does it help track and categorize expenses, it readily produces essential reports like profit & loss statements or item sales. It doesn’t automatically calculate my corporate taxes, but it does let me invite my accountant to view my records so she can grab all the numbers she needs at tax time to prepare my business tax return for me. A lot of headache is avoided by simply being organized.

Likewise, I also use a payroll software to pay myself from my company. This lets me issue a formal T4 for myself at tax time but also ensures I remit the correct amounts of income taxes and CPP to the government every time I pay myself. I do this to avoid a big bill for these expenses at the end of the year. If you’re not regularly submitting your income taxes and CPP to the government, make sure you set up a savings account and set aside at least 30% of your business income for taxes. As a freelancer or small business owner, even a small tax bill can catch you off guard. Make sure you’re saving more than you think you need to, and you’ll find it’s probably just enough.

Prepare for tax-time year round

In addition to keeping your finances organized and recording all your business transactions, there are other important tax considerations as a freelancer or small business owner.

If you’re earning more than $30,000 per year, you will need to collect and remit GST or HST depending on the province in which you do business. This also lets you claim any GST or HST you pay on purchases for your business. You have to know how much you’re making to know if you need to charge clients and customers GST or HST, so this is yet another reason to take meticulous care of your business finances.

Take advantage of tax credits for the self-employed

One of the major advantages of being self-employed is you’re in charge of your income, and many of your expenses, so you can optimize them to minimize taxes. The general rule of thumb is that if you spent money to earn self-employed income, then it’s a business expense.

If you work from home, you can claim a portion of your household expenses like rent and utilities as business expenses. All you need to do is dedicate a specific area or room of your home to your business, and make sure to keep track of your household expenses. If you use online software, like TurboTax, to file your personal income taxes, you will be prompted to enter in the square footage of your home dedicated to your business, and any related household expenses. It will automatically calculate how much you can claim.

This year, I set up a Health Spending Account for my business, which lets me claim up to $3,000 per year in health-related spending as business expenses. This includes everything from my private health insurance premiums to out-of-pocket dental, vision, and prescription costs. It’s almost always preferable to pay for things with gross revenue rather than net income, so I was thrilled when I learned I could make my contact lenses and massages count as business expenses! If you can’t set up a Health Spending Account, remember your health expenses that are greater than 3% of your personal net income or add up to $2,237 are tax deductible. Just another reason to be diligent about tracking and managing your expenses!

Saving Tips

How To Financially Plan For An Unplanned Baby

I had a positive pregnancy test in hand only 4 days after I had moved into a new one-bedroom apartment.

I hadn’t even bought living room furniture for my new place yet, let alone unpacked. I sat in my bathroom trying to wrap my head around those two pink lines, then promptly went to my computer and canceled all the speaking events and conferences I had planned to attend in the summer.

The weeks and months that followed that first day that I entered motherhood were marked by some of the most heartbreaking, agonizing, and terrifying moments of my life. I’m still going through it, though the shock has at least worn off.

50% of pregnancies are unplanned

If you’re already rolling your eyes at my “accident”, please stop. I, too, used to nod with fake empathy whenever a pregnant woman insisted her chosen method of birth control failed — and now I’m paying dearly for all my smug doubt.

During one of my many late nights googling all things pregnancy related, I learned 50% of pregnancies are unplanned. Furthermore, women elect to carry 57% of those pregnancies to term. In other words, my unplanned pregnancy and my decision to keep the baby made me part of the majority for my situation, even if my circumstances initially felt achingly lonely.

Until now, I’d never had so much as a pregnancy scare. I never worried “what-if” at any point through college or my early career. I had the privilege of being pro-choice without ever having to make the choice. I trusted birth control implicitly. I thought it was hard to get pregnant. I never thought this would happen to me.

It did.

To say the timing is bad is an understatement

It’s terrible timing. But I’m still of the mindset that terrible timing doesn’t necessarily mean a terrible event.

I normally don’t like to share emotionally heavy life-events online until they’re long over. I don’t have that luxury with my pregnancy. It’s too obvious to hide and too all-encompassing to ignore. My child became the centre of my world the moment I learned of her existence. By the time I will be able to vocalize why this all happened the way that it did, I will still be in the thick of motherhood, tackling some new soul-stretching, resilience-building, heart-expanding feat with her. This is who she is to me, I already know this is who she will always be.

Over the past few months, I’ve told friends and family about my pregnancy while grappling with the lifetime financial and logistical challenges of adding a child to a life already operating at maximum stress.

I was only a year into self-employment, and while I had survived that dreaded first year of business with a profitable, self-sustaining company, I hardly wanted to add a child to the mix. Every business decision became suddenly weighty and consequential. I couldn’t experiment or take risks because any blow to my bank account could spell long-term disastrous repercussions. I couldn’t be frugal anymore, either. Pregnancy necessitated a new wardrobe, plus a hoard of additional expenses like expensive vitamins and birth classes, not to mention no freedom whatsoever to subsist on rice and ramen if I had to skip a paycheque or two.

The months have ticked by in alternating states of wild productivity and paralyzing panic. Sometimes I’d find those inspiring single-mother entrepreneur stories and think, “that’s all this is! I’m going to figure it out and everything will fall into place because I’m working so hard! I’ve never been so motivated and creative in my life!”. The rest of the time I thought, “I am one of the failures they don’t write about” and would cry helplessly in the bathtub for two hours.

I lost entire days to my grief, sweatpants, and Netflix. I lost even more in pure, unadulterated joy: my baby’s ultrasound photos, her gentle kicks while I work, the very thought of her in my arms, and in my life, forever.

How to afford an unplanned pregnancy

They say the average cost to raise a child in Canada is $250,000, which means an unplanned pregnancy is more or less the financial equivalent of being signed up for a small mortgage while unconscious. You wake up dazed and shackled to a bill for an amount that seems comical in its size. If you’ve always wanted a house but you’re not sure you can afford it, do you bail or do you find a way make it work? If you’re up for the challenge, here are my suggestions for managing your unplanned pregnancy:

1. Make your decision based on more than the financial implications. I’m never going to tell anyone whether or not to carry a pregnancy to term, or what reasons should make or break their decisions, but I do want to encourage you not to let finances be the deciding factor either way. When you first find yourself unexpectedly pregnant, how to afford another human will easily make its way to the top 3 of your List of Main Concerns, but don’t let it be the only item on your list. Money is important, but it’s not everything. If everyone made their decision as to whether or not to have children based purely on financial considerations, no one would have kids.

2. Realize that you have 9 months to get your financial shit together. One of the best things about pregnancy is that it lasts a long time. A really long time. Pre-pregnancy you probably thought human gestation was only 9 months, but it’s actually 40 weeks which makes it more like nearly 10 months. Whether it seems like it or not when you’re battling 24/7 nausea or needing to go to bed at 7pm, nearly-10-months is long enough to re-jig your budget, earn more income, and find a solution to manage your debts. Virtually everything is more manageable when you realize you probably won’t need to buy any maternity clothes until your second trimester, and your first daycare bill is probably more than a full year away. Your baby is not arriving next week. Chill.

3. Don’t let your stress and worry keep you from enjoying the good parts. One of the best pieces of advice I received very early in my pregnancy was to enjoy it. When you find yourself accidentally pregnant, it’s easy to feel so awkward, ashamed, and guilty that you don’t feel entitled to beautiful experiences. Don’t cheat yourself. You’re allowed to buy cute maternity clothes, dream about your baby, and enjoy every single tiny flutter and kick. Things will be hard, and people will tell you that it will be very hard (and they’ll say it with that awful look that’s two-parts pity and one-part doubt that you’ll even be able to manage), but when you get the parts in your pregnancy that are easy and fun, indulge. I found I could acknowledge the impending financial and logistical challenges of single motherhood while simultaneously falling deliriously in love with my growing baby. These things are not mutually exclusive. No matter what your circumstances or how many challenges you’re facing, you’re still entitled to all the joys of pregnancy and motherhood. Take them unapologetically.

4. Plan for what is in your control, do your best with what is not. If you’ve been procrastinating any responsible adulthood tasks, few things will scare you out of your laziness like an unplanned pregnancy. Mere weeks after my positive pregnancy test, I set up a health spending account through my business and signed up for private health insurance. I made a baby budget that would let me upgrade to a 2-bedroom apartment. I drafted blog posts, email newsletters, and scripted YouTube videos to publish during a self-funded maternity leave. I haven’t gotten everything figured out, but I’ve managed to organize enough within my control to no longer feel like the sky is falling. I’m still winging the rest of it, and I don’t feel bad about that. Most people will tell you that you “can’t plan” for children. They’ll arrive on their own time, in their own way, and their sleep schedule will be wholly out of your control. But you can plan for diapers and daycare and other things within the realm of your control, so focus on that.

No one is really planning anything anyway

I know many people try to plan their pregnancies around the rest of their lives. Often when people wanted to talk to me about pregnancy, they liked to share how they were really looking forward to starting a family after they traveled or bought a house or secured a promotion. I tried to feign understanding, but I could feel my eye start to twitch whenever someone told me they were putting off “trying” in order to attend a friend’s wedding in a region with Zika. Maybe I was jealous of their sense of control and order over their lives when I seemingly had none. Maybe I was already cynical and jaded enough to be anything other than quietly amused by the ridiculous notion that you have any control in the first place.

For all the time we spend meticulously planning our lives and our finances, many things will be outside of our control. An unplanned pregnancy is only one possible scenario. Earlier this week my friend Barry shared his post:

How Much Does IVF Cost?

We represent opposite situations, but the heart of the matter has one big similarity that’s too often forgotten:

Sometimes your family planning doesn’t go the way you planned, and it ends up costing you a lot.

How I’m coping with the financial implications of an unexpected baby

In the early months, I wavered between staying self-employed and going back to a traditional job. I lusted after a steady paycheque and health benefits the way you would standing in front of a buffet after months starving on a deserted island. Rejoining the traditional workforce would have meant I was entitled to Canada’s luxurious government-sponsored year-long paid maternity leave. As an entrepreneur, my maternity leave was entirely my responsibility and no one was going to help.

I chose it anyway.

I’m now signed up for single motherhood as an entrepreneur. I’m not sure I can think of a more daunting financial undertaking.

We don’t always get to choose exactly how our biggest life events play out. Sometimes managing your finances is a lot more about adapting to changing circumstances rather than planning for them. Of course, I always knew this (see Financial Black Swans: Why Your Money is Never Wholly In Your Control and The Future You Are Saving For Does Not Exist), but I didn’t expect to put my perspective into practice in such a big way.

Where we go from here

Going forward I will be creating content around the costs of pregnancy, how to afford a baby, and more. This will never become a parenting or mommy blog, but many millennials are parents now and it’d be remiss to neglect the financial implications of this major life event, especially as it becomes part of my own story.

To answer the expected questions…

  • My baby is due in August
  • The father is present and very involved
  • My family is very supportive and very excited
  • My baby is a girl!
  • We have not settled on a name for her yet
  • I feel great! My pregnancy has been super easy with very little discomfort

I’ve been filming regular pregnancy updates for YouTube for months, which means even though I’m making this announcement only one before I enter my third trimester, you haven’t missed a thing. You can view my pregnancy video playlist HERE.

I’m excited to share this new twist with all of you!

Saving Tips

Group RESPs Are The Worst Way to Save for Your Child’s Education

Now that I’m on the verge of being called “mama”, virtually all my attention and focus is devoted to the arrival of my little babe — and that includes her current and impending financial impact.

After the costs of pregnancy, my maternity leave, and more baby gear than I knew existed let alone was necessary, one of the other major financial things I’m mulling over is saving for my child’s post-secondary education. The moment my girl has a SIN number, she’ll get her first savings account: the RESP.

What is the Registered Education Savings Plan (RESP)?

The Registered Education Savings Plan or RESP is yet another awesome tax-advantaged savings account available to Canadians, like the TFSA or RRSP. This account is designed to help and encourage parents to save for their child’s post-secondary education. One of the biggest advantages of the account is free government grants that match 20% of your contributions, to a maximum of $500 per year. This is called the Canada Education Savings Grant, and you can receive a lifetime maximum of $7,200 for your child’s post-secondary education. Just think: that’s $7,200 less in student loans your child will have to borrow. Nice, right?

Related post: The TFSA vs. The RRSP

Like the TFSA or RRSP, you can invest your child’s RESP in things other than a savings account. When you invest an RESP in mutual funds, stocks, or ETFs, you can earn a higher return — giving your child even more money for their future education. The RESP itself has a lifetime contribution limit of $50,000, but interest, dividends, and capital gains can make this amount grow to much more.

Any amount you save will help your child, so don’t shy away from opening an RESP even if your budget is so tight you cannot afford to put more than $25 or $50 per month into the account. You have approximately 18 years to save for your kiddo’s education, which is plenty of time for even small amounts to make a difference!

I have only one word of caution: make sure to open an individual or family RESP, and steer clear of Group RESPs or “Scholarship Funds”.

What’s the difference between Group and Individual RESPs?

An individual or family RESP is an account you open and manage at your bank. When you open an individual or family RESP for your children, all the money you put into it is allocated directly to them. When it comes time for them to enroll in post-secondary, they are the only ones that get to withdraw from the account and they are the only ones all the savings you’ve worked so hard to set aside can go to.

A group RESP is typically provided by a company, not by a bank. In a group RESP, often called a “scholarship fund”, the money from multiple contributors for multiple children of a similar age is pooled together. Everyone agrees to keep up contributions, as well as put in their CESG grants, to help the entire pot grow. When the children grow up and attend post-secondary, they all get a piece of the pie — and there’s usually more of it, because over 18 years, a number of parents will have had to withdraw from group RESP because they couldn’t keep up with contributions or they came to their senses and decided to manage their child’s RESP themselves. However, the fees they paid and most of the contributions they made stay in group RESP, benefiting the people that remain.

There’s no real benefit to choosing a Group RESP over an Individual RESP for your child. Group RESPs do not typically outperform individual RESPs, though they’ll claim to. However, most of the “return” on Group RESP and Scholarship Fund contributions is actually the result of the Canada Education Savings Grant coupled with the fund’s exorbitant fees.

Your baby deserves better than a group RESP

Group RESPs are the new thing that makes me extra rage-y, much like MLMs, gifting circles, and payday lenders. Group RESPs/Scholarship Funds actually have a lot in common with MLMs and payday lenders in the sense that they target economically vulnerable people with wild claims that they can solve all your financial woes with ease — a telltale sign they’re about to make your financial health much, much worse.

There is a significant risk that participants in group plans end up in a worse financial situation as a result of their participation – Human Resources & Social Development Canada

The main wealth-killer in group RESPs is their fees: enrolment fees, sign-up commissions, and so on. These come hard and fast in the first few years that you open the account, which means your contribution barely grows. Like for this mom who put $568 into a group RESP and then received a statement that her balance was only $66. That’s $502 up in smoke!

Fees are also on the other end threatening to kill your investment if you dare take it out early. If you realize your scholarship fund is underperforming and you want to go elsewhere, taking your money out can mean losing almost all of it. Like this mom who wanted to withdraw $3,000 from a group RESP, only to learn she’d spend $2,000 in fees to do so.

Another major downside is group RESPs can be specific about what type of post-secondary education they cover. The Canadian government allows for RESP funds to be used for more than college or university, your child can also put them towards part-time studies or trade school. However, a group RESP might have stricter rules. Which means you could diligently contribute to a group RESP for 18 years, only to find your child wants to become a hairdresser, enrolls in beauty school, and is told the scholarship fund won’t be covering that. Not cool.

You have 60 days to pull your money out of a group RESP once you sign up, but once you’re past that mark, it becomes so expensive to leave you might want to sit and tough it out and hope your child grows up to attend a traditional post-secondary institution.

Watch out for financial salespeople pushing Group RESPs

In my city, a couple hosts free baby budgeting workshops at a local post-secondary institution. They seem to be very nice people, the college gives it an air of legitimacy, and every expecting parent wants to know how to afford their new little bundle of joy. However, if you look closer, you’ll see the couple teaching the free baby budgeting workshop are work for one of the largest financial brands that sell group RESPs.

How much do you want to bet their “free” workshop includes a hard pitch for the horrendously expensive lousy group RESP they make huge commissions from every sale of?

People selling Group RESPs are shamelessly aggressive about it. They troll birth classes and maternity wards, looking for new parents who want the very best for their new baby and con them into a bad product under the guise of helping them provide for their child’s education. They send pamphlets out with free coupons for formula and diapers. They randomly approach very pregnant women and thrust their business cards in their face. It’s as bad as cord blood banking, except you never expect stem cells to pay you back.

How do I save and invest properly for my child’s future?

Step one: steer clear of Group RESPs and Scholarship Funds. This alone will ensure your child will actually have savings for their post-secondary education in their future.

Step two is a matter of setting up an account at a trusted institution that you can make regular contributions to. It’s important to invest your money to earn the highest return, but if you’ve already got a newborn to master, you might not feel confident taking on the stock market. It’s ok to start with a savings account, and move to a mutual fund or ETF portfolio later. In the meantime, focus building up that account so you can earn the maximum Canada Education Savings Grant. This boost from the government is a 20% return on your contributions all on its own!

Helping your child with the costs of their post-secondary education is a generous and powerful gift that they will reap the financial benefit of for years to come. For this reason, it’s even more important that you choose an RESP that maximizes your contributions and ensures all your savings goes directly to your child where and when they need it.

Saving Tips

Never Pay More Than 5% Interest on Your Credit Card Debt

When it comes to paying off debt, focusing on ridding yourself of the highest interest balance first. This is often called the Debt Avalanche Method and will save you the most money in the long run. Most credit cards have interest rates of 20%, so carrying even a small balance can be extremely expensive. The crusade against consumer debt is always at the forefront of personal finance advice, because of these high-interest rates.

But what if you could lower your interest rate to something that doesn’t make you feel like your face is on fire every time you open your credit card bill?

You have no reason to be paying double-digit interest rates on your debt

The truth is, you don’t have to (and shouldn’t) be carrying a balance at 20%. Heck, if you have good credit, even 10% is too high. Why? Because if you have a high credit score, you can take advantage of low promotional interest rates on new credit cards or balance transfers. You’re also more likely to be eligible for personal loans that will let you consolidate your credit card debt at a lower rate.

Realistically you can probably find a way to pay only 5% (or less) in interest on your credit card debt, which takes one of the most toxic forms of debt consumers find themselves caught up in, and transforms it into something almost on par with less agonizing debts like student loans or car loans.

Paying less interest on your debt will help you pay it off faster

If you owe $5,000 in credit card debt, you might be spending as much as $1,000 in interest per year lugging it around. You’ll need to be making payments of at least $83 per month, and not be adding at all to the balance, simply to break even.

If you’re cool with paying $83/mo to get absolutely nowhere then, by all means, stop reading. But if you’re tired of seeing that your debt balance hasn’t budged for months or years, it’s time to develop a new payoff strategy, and one of the best ways to start that off with a bang is to make sure $83/mo isn’t going up in smoke.

A lower interest rate will reduce both the overall cost of your debt AND the total time you spend in debt.

For example, let’s say you owe $5,000 on a credit card and you make payments of $100 per month.

At 20% interest, in one year you’ll have made $1,200 of payments, but $980.61 went to the interest which means your ending balance is only $4,780.61. At 5% interest, you’ll have made those same $1,200 in payments, but only $227.92 went to the interest which means your ending balance is $4,027.92.

After 5 years, you’re still over $3,300 in debt in the first scenario. In the second, you’ve already been debt-free for 4 months.

How do I get an interest rate less than 10% on my credit card debt?

There are two ways:

  • Opening a new credit card with a lower interest rate
  • Taking advantage of a promotional balance transfer offer on an existing credit card

Both strategies require that you have good credit. If you don’t, you need to keep making regular payments on your existing debts until you do. I realize that it seems unfair that people who are struggling with debt will not have as many opportunities to make their debt more manageable as people who don’t even need those opportunities in the first place, but that’s how the credit card industry works: the less you need it, the more you’ll be rewarded. Luckily for all of us, it’s pretty easy to get a credit card.

There are a few select low-interest credit cards available, but usually, even the best interest rates are 8% to 13%. To get a single-digit interest rate, your best bet is to find a promotional balance transfer offer.

How to take advantage of a promotional balance transfer rate

A new credit card or an existing credit card that you don’t really use is likely to offer you a promotional interest rate on balance transfers, for anywhere from 6 to 12 months. These rates are typically from 0% to 3% interest, plus a balance transfer fee.

If your credit card debt will take you 3 months or longer to pay off, it is almost always cheaper to take advantage of a promotional balance transfer rate, even if it includes extra fees.

You should do the math first, though!

For small balances that you can pay off quickly, it’s typically not worth the hassle or fees to chase low-interest rates. However, if you owe more than $3,000 and you need 6 months or longer to whittle it down to zero, a balance transfer can make a huge difference. To determine whether or not the opportunity is worth it for you, calculate how much interest you’ll pay leaving your balance exactly where it is. Then calculate how much you’ll pay if you transfer it to a lower-rate card, including any associated transfer fees and costs. Compare the two. If the difference is more than $200 in savings, it’s probably worth the hassle to take advantage of the lower rate.

THERE IS ONE RISK THOUGH! Typically if you don’t manage to pay off the balance by the time the promotional term runs out, the amount owing will begin accruing interest at the cash advance interest rate, which is usually much higher than your average 20% credit card interest rate. Depending on how far you’ve fallen behind on your debt repayment plan, this can rapidly undo all the savings of transferring the balance in the first place.

You have to stay out of debt

The main danger of taking advantage of a promotional balance transfer or a new credit card, is once you move your balance over, you ring it up all over again and find yourself now with two debts instead of one.

If you got yourself into credit card debt, you cannot use credit cards until it’s paid off.

Once you make the balance transfer to the low-fee card, you need to tuck away (or better yet, cut up) all of your credit cards and switch to an all-cash diet until you can get your finances organized again. Going 6 months or a year without credit cards might seem massively inconvenient (because it is), but spending that on a debt treadmill is even worse!

Saving Tips

Why You Need to Put at Least 10% Down On Your First Home (and How to Save It!)

Homeownership is a major personal and financial goal for most young people. It’s also one of the biggest financial challenges.

With real estate prices seemingly rising endlessly in the most desirable cities in the US and Canada, it can seem impossible to get a foothold in the market. As a result, many young people panic and rush to buy before they can really afford it.

If you can’t afford to put 10% down, you can’t afford a home

Sad news everybody: if you’re scraping together 5% to put down on a home (and struggling to even come with that), you’re not ready to become a homeowner.

Homeownership is hella expensive, and this is true long after you get the keys to your new place. Virtually everyone focuses on getting together the down payment because it’s the largest upfront expense, but the ongoing costs of owning property — like repairs & maintenance, mortgage default insurance, and property taxes — can really put a damper on your long-term financial health if you’re not careful. Furthermore, there’s always the risk the value of your home will go down, and when that happens, your mortgage payment will not go down with it!

Related Post: 7 Reasons Why You Should Never Borrow Money For a Down Payment

In order to keep extra cash in your monthly budget and protect yourself from volatility in the real estate market, you need to put at least 10% down on your first home. Ideally, you’d put 20% down, but with the average house price in Canada nearly $500,000, there are very few 20- and 30-somethings with a spare six-figures lying around. A 10% down payment is enough to lower your monthly mortgage payment, reduce your mortgage default insurance, and secure enough equity in your home to whether small dips in the real estate market.

A 5% down payment gives you only 1.6% equity in your home because the rest of the cash goes to mortgage default insurance. If you put 10% down, you’ll secure 7.2% of equity in your home. In other words, saving another 5% of the house value will give you almost 6% more equity. Talk about a great return on your investment!

Save in your RRSP first, TFSA second

I’ve made the argument for saving your down-payment in your Registered Retirement Savings Plan (RRSP) instead of your Tax-Free Savings Account (TFSA) before, but fundamentally it boils down to one simple truth:

It is better to spend tax-deferred savings than tax-free savings.

The TFSA is the best retirement savings vehicle available to Canadians, but most don’t see it that way. Because the account has no rules against or penalties for withdrawals, most people use the TFSA for everything but saving for retirement. This is where they stash their vacation savings, their spending money, and, yes, their house down payments. But constantly making contributions and withdrawals from the TFSA undermines its tax-free power. You don’t need to earn tax-free interest on your vacation savings, you do need to earn it on your retirement savings.

In Canada, you can withdraw up to $25,000 from your RRSP for a down payment on your first home under the First Time Homebuyer’s Plan. Of course, in order to make a $25,000 withdrawal, you’ll need to actually have $25,000 in your RRSP in the first place, so start saving. Once you’ve banked $25,000 there, you can start saving the rest of your down payment in a TFSA or unregistered account.

Related Post: How to Use the RRSP First-Time Homebuyer’s Plan

Cash is king

When it comes to saving up your down payment, I want you to be bored. I want the excitement of watching that account grow to rival watching paint dry. It really should be that dull. Why? Because if you’re investing your down payment money and it starts to get exciting, you’re taking on too much risk.

Your down payment isn’t about risk or growth, it’s about savings.

The stock market has been on an uncharacteristically long 8-year bull run, which has been really fun for all of us but is starting to feel like a super fun carnival ride we’re not sure will ever end and therefore is making us nauseous despite its awesomeness. Heads up: it will eventually end. And when it does, that’s the last place you want your down payment money to be.

It’s hard to put tens of thousands of dollars in a savings account returning 1% (or less), but if you want this money to put a roof over your head later, you can’t afford to take on the risk required to earn a higher return. If you’re going to be buying a home in 2 years or less, your down payment should be in a simple savings account. If your plan is to buy within 2 to 5 years, you can work GICs and super safe mutual funds into the mix. But unless you’re not planning to become a home owner for 5 years or more, stay out of the stock market.

Don’t forget to set aside extra for those added costs

Land transfer taxes, realtor fees, home inspection costs, and sales tax on your mortgage insurance can add anywhere from $5,000 to $15,000 (or more!) to the cost of buying your first home. Again, this is why a 5% down payment is NOT enough! There are so many additional costs to purchasing a home, that if you only saved enough for the 5% down payment, you’re likely going to end up thousands of dollars in debt when you finally purchase.

You’ll need to save above and beyond your down payment fund by at least 15%. This means if you need a $40,000 down payment for the property you want, you’ll need to save an extra $6,000 for possible associated closing costs.

Don’t forget new homes come with a whack of additional expenses, like moving costs and new furniture. If you’re becoming overwhelmed by the price tag of home ownership remember first that I told you so, and second, you can cut costs on moving and furniture far easier than you can cut costs on land transfer taxes. The most important thing is to be aware of what expenses are heading your way and which of them you have to take care of and which ones are avoidable, so nothing catches you by surprise.

Save consistently and wait for the right moment

It’s hard to save up a 10% down payment. It takes a lot of discipline and a lot of time. If you find it painful to sock away hundreds of dollars a month now, just remember you won’t get to ever take breaks from your mortgage. This is good practice!

Once your savings starts to inch closer and closer to your 10% down payment goal, you want to start looking at homes in your price range and watch the real estate market so you can find the right opportunity to buy. This means the right property AND the right moment.

Happy house hunting!