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  • Savings Options

    (I'm hoping this is the right place to post this question.)

    For the first time in years, I find myself with an excess of financial options.

    Until last year I was a student, so my incomes were tightly budgeted with my expenses, without much room for savings. Now that I'm out of school, I have two seasonal contract jobs lined up back to back (essentially guarenteed employment for the next 12 months) and one is recurring (guaranteed 6 months out of the year). I find myself with money in my bank account again!

    One of the first things I've set up is a budget to track and compare my projected and actual expenses to help make sure I stay on track. I'm using the following budgeting amounts:

    Housing: 30%
    Transportation: 18%
    Household: 7%
    Food: 14%
    Savings: 20%
    Debt: 0%
    Other: 11%

    The original Savings bracket was 10%, but as I came out of school with no debt (due to abovementioned tight budgeting) I added that 10% allocation to my savings bracket until I need to allocate for debt (which I'm hoping to avoid for the forseeable).

    After reviewing the last few months' expenses, I find myself using only 35-60% of my take-home (which includes using up my 20% savings allocation). Most of the difference is made up in the housing bracket - my housing expense at the moment is 0% and moves up to 5-8% in 6 months (living at home for the length of this contract and then moving into dirt cheap staff housing in another town for the next one). After that though, the worst case scenario is I work 6 months a year with my current contract, and have to survive the other 6 months off that income.

    My question is what to do with the current windfall? My savings budget already contributes to an emergency fund (10%), a pension buy-back payment (4%), a vehicle repair fund (1.7%), travel fund (1.7%) and an retirement TFSA (2.6%). I'm starting to look ahead, so should I reallocate that 20-30% of housing expense to a future house downpayment (which I hope to make in ~5 years), top up an RRSP/TFSA retirement fund (would like to retire in 30-35 years), look at investing in something like dividend stocks (I've been looking at DRIP investing), hold on to it in regular savings 'in case' for next year, or is there another option I'm not seeing? Optimizing RRSP contributions doesn't do much for me tax-wise (annual taxable income is under 45k and I contribute to a employer pension plan at 9.4%).

    Any help or suggestions are welcome!

  • #2
    RRSP? Are you in Canada? I'm not familiar with the contribution limits/rules for those. Can you elaborate?

    If you want to buy a house in 5 years, then absolutely start saving now. You will want 20% down plus a 6 month EF in place.

    How much do you currently have saved/invested?
    Brian

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    • #3
      Yeah, Canadian. RRSP contributions are maxed at 18% of the previous year's earned income to a maximum amount ($22,970 for 2012), minus any employer pension plan contributions, plus any unused contribution room from previous years. I have unused contribution room in excess of 18,000 from previous years. The marginal tax threshhold for 2012 is 24.15% at $42,707 for annual gross, then 31.15% between that and $68,719. Because I anticipate that my retirement income will (hopefully) be more than I'm earning right now, that money will be taxed on withdrawal at a higher rate than I'm currently paying; I'd be better putting it into a Tax Free Savings Account to grow for tax-free withdrawal later (though contributions are capped at $5000 annually). Of course, once I get a full-time job and move up a tax bracket, that would change, and paying into RRSPs instead of TFSAs will a helpful tax-deferral tool.

      Right now I have about $1500 in RRSPs (mutuals/GIC mix), $800 in travel, $600 in emergency fund, $150 in a retirement TFSA. Between now and the end of the guarenteed employment timeframe (provided that all contribution allocations remain status quo) I expect to have $1600 in RRSPs, $3600 in emergency fund, $1400 in travel, $600 in car repairs, and $1350 in retirement TFSA.
      Last edited by JenY; 11-13-2012, 12:14 PM.

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      • #4
        After maxing out retirement contributions, many people open non-retirement accounts and begin investing in stocks and/or bonds. The Motley Fool site (fool.com) has a pretty good "How to Invest" series online.

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