If you’ve read my book Building Wealth And Being Happy: A Practical Guide To Financial Independence, you may remember that I had to cut some of the images out because of formatting issues. Here’s a flowchart that will help you prioritize your savings if you’re Canadian. If you’re American, get out of here! Go to your own flowchart.
- Emergency fund. Keep 3-6 months worth of expenses in a high interest savings account for things like major car, home, or dental repairs. At a certain point, say once you also have 3-6 months worth of expenses in your investment accounts, you may not see the need for an e-fund anymore. You can use credit cards and lines of credit in the event of an emergency. It only takes a couple of days to sell and transfer assets from your brokerage’s taxable account to you chequing account. Your comfort level with an emergency fund is totally personal and there’s nothing wrong with having a large one – but if it’s more than 6 months’ worth of expenses you’re missing out on investment returns that money could be earning for you.
- Employer plan to match. Contribute to your company’s RRSP/RPP to get the employer’s full match. The match is an instant 100% return!
- Debt. Paying off debt is amazing because it is a guaranteed return. It’s one of the only free lunches you can find in the world of investing! Make sure to read the earlier sub-chapter on Stomping out the debt monster.
- Tax-advantaged accounts. Contribute to your RRSP and TFSA, prioritizing based on your expected future tax brackets. The RRSP is the better option if you’ll be in a lower tax bracket in the the withdrawal stage than you are in the accumulation stage, and the TFSA is the better option in almost all other possible scenarios. If you’re planning on funding your child’s education, you can also contribute to a Registered Education Savings Plan in this step.
- Taxable accounts. Contribute anything that doesn’t fit into your RRSP or TFSA into a normal, taxable, investing account. You can open one at any of the big banks or popular discount brokerages like Questrade and Virtual Brokers.