Debunking 11 savings myths

Wondering why, when, or how you should be saving? To answer these questions, we've debunked 11 myths about personal savings. We shed light on RRSPs, TFSAs, retirement savings, and investments. You'll see that it's easier than you think to maintain healthy personal finance habits and achieve your goals.

01 "An RRSP is only good for retirement savings."

Many people mistakenly think that a registered retirement savings plan (RRSP) is only useful for putting aside retirement funds, as the name suggests. While this savings vehicle was developed with retirement in mind, it's also an excellent way to save for other projects, such as going back to school or buying your first home.

02 "The government will take care of my retirement."

While it's true that government programs provide retirement income, it probably won't be enough to keep up your current lifestyle. Together, the Québec Pension Plan (QPP), Old Age Security (OAS) pension, and Guaranteed Income Supplement (GIS)—if you're entitled to them—only add up to about 30 to 50 percent of your gross salary based on your annual pre-retirement income. That's why it's important to rely on your personal savings to ensure that your retirement income meets your needs.

03 "I have to earn a lot of money if I want to save."

No matter how much you earn, it's possible to save. Whether you put money into an RRSP or a tax-free savings account (TFSA), no contribution is too small. You also don't have to wait until you have a higher income or full-time job to start saving.

As of 2009, Canadians begin accumulating TFSA contribution room as soon as they turn 18, with any unused room carried forward from one year to the next. You don't need to have a high income to start contributing! With the RRSP, you begin accumulating contribution room as soon as you file your first income tax return, regardless of the amount. However, you may decide to put off using it until you have a higher salary to reduce your tax bill.

04 "I'm too old, there's no point in starting to save now."

Don't worry! While there are many advantages to saving when you're young, it's never too late to start. You can still put money aside and invest once you're retired. It doesn't matter how old you are; the important thing is to save. Whether you're 30, 40, or 50, you have the opportunity to grow your savings for at least a few years. Any investment income you earn—$50, $500, $5,000, or $50,000—is extra money in your pocket!

05 "I'd better pay my debts before I start saving."

Not all debts are bad. For example, if you have an outstanding balance on a credit card, it may be wise to pay it off as soon as possible since the interest rate is very high. On the other hand, if you have low-interest or investment debts—such as a student loan or mortgage—it's not always necessary to repay them right away. In that case, you can save while slowly repaying your debts.

06 "Retirement is only for baby boomers!"

Everyone has their own vision of retirement, and our perceptions tend to vary from one generation to the next. There are many ways to retire! Retirement is just as accessible today as it was in your parents' generation; you just need to plan for it, starting now. You might want to work all your life, but unfortunately, you can't predict what the future holds. That's why it's a good idea to contribute to your retirement savings today, while you're still active.

07 "I need to save $1 million for my retirement."

While it's generally recommended that you have 50 to 70 percent of your working-life income after retirement, there is no perfect number. It all depends on your situation, the number of years your retirement will last, and the type of retirement you'd like to have. It's up to you to assess your needs. Of course, a personal finance specialist can help you plan this part of your retirement.

08 "It's better not to invest and risk losing everything."

If you don't make your money grow, annual inflation will erode your purchasing power over time and make you less wealthy. Letting your money sit in a bank account is a mistake you should avoid. That said, you'll need to invest according to your risk tolerance and diversify your investments. You could opt for a combination of guaranteed investments and non-guaranteed investments to balance the possible fluctuations in your savings.

09 "RRSPs are better than TFSAs... TFSAs are better than RRSPs."

RRSPs and TFSAs offer different tax benefits and can help you achieve your goals and plan your retirement. It all depends on your situation and your savings goals. For example, if your income is low or if you already contribute to a pension plan offered by your employer, it might make more sense to save in a TFSA. Conversely, RRSPs may be a better option if you have longer-term goals and want to enjoy tax deductions today.

10 "The TFSA is just a simple savings account that doesn't earn anything."

Like an RRSP, a TFSA is a savings vehicle that allows you to invest in savings products that have the potential to provide investment income. It's up to you to invest in the products that will help you reach your goals and make your TFSA more than just a simple savings account. In addition, if you want your money to grow, try to avoid frequent withdrawals.

11 "It's best to keep all my money in the same financial institution."

Just because you have a bank account at an institution doesn't mean you need to have your mortgage, RRSP, TFSA, and so on at that same institution. You can shop around for savings vehicles and products: read their various information documents, learn about the products offered and their features, compare performance histories (even if past performance is no guarantee of future returns), and more. The important thing is to choose the investments that best meet your needs.

 
Ultimately, the purpose of saving is to help you achieve your goals—and you can do it without making sacrifices. Creating a budget and opting for automatic savings through payroll deduction or automatic bank transfers are just two of the ways to save without thinking about it.

Everyone has the power to save! All you need to do is set clear goals and find the right tools to achieve them, based on your financial and personal situation. Feel free to do some research and ask questions. Regardless of your age, the important thing is to develop good saving habits to ensure sound management of your personal finances.