5 tools to get your finances organized

Shannon Lee Simmons dropped by Cityline to share five important financial tools you need to ensure your finances are in order.

With tax season well underway, Shannon Lee Simmons dropped by Cityline to share five important financial tools you need to ensure your finances are in order, in addition to your daily bank accounts.

1. Establish your emergency savings account

Shannon recommends having enough money to hold you over for a minimum of six weeks. It can take up to six weeks for employment insurance to kick in, so it is important to have this money set aside in case of job loss or emergencies.

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2. The trick with credit cards

As surprising as it sounds, credit cards can be a wonderful financial tool, if used correctly.

Unlike a line of credit, a credit card is an interest-free loan as long as you pay it off within the grace period (typically 21 days).  If used and paid down each month, credit cards improve your credit rating as well as points for air miles, gifts, which saves you money in the long run.

3. Consolidating your credit with a line of credit

Every household should have access to a line of credit to be used for emergencies or to consolidate any debt that you have on a credit card.  Shannon urges to remember not to pay off credit cards with lines of credit unless you can’t pay it off before the end of the grace period.  Most lines of credit charge you interest on what you’ve used on an average daily balance, so it’s not interest-free for a period of time.

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4. The wrap on RRSPs

The RRSP (or Registered Retirement Savings Plan) is probably Canada’s best known savings account. RRSPs are tax-sheltered, which means any income, dividends or capital gains that you receive from investing your money isn’t taxed right away.

In addition, when you save money to your RRSP, you can deduct the amount you saved from your income. For example, if you make $80,000 and saved $10,000 to the RRSP, you’d now be taxed like you made $70,000. This is the major appeal to the RRSP, especially during RRSP season, which is right now.

Shannon says to note that when you want to take money out of the RRSP, all of it is taxed.  You will pay tax now and in retirement.

The only way to take money out of your RRSP without paying tax is for the first time home buyers plan or lifelong learning plan.

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5. Your tax-free option

Everyone should also have a TFSA (Tax-Free Savings Account).  It’s the often-forgotten powerhouse savings account in Canada.  Shannon says that many people think it’s just a fun savings account to put short term assets, but the TFSA is a powerful savings tool.

The TFSA allows you to grow your investments tax-free—just like the RRSP—but instead, when you take money out of the TFSA, now or in retirement, you don’t pay tax on anything. There are no penalties, no strings attached.

Taking money out of the TFSA rather than an RRSP can lower your tax bill in retirement and potentially make or break whether or not you qualify for certain government pensions such as old age security.

The contribution limit per year just increased to $5,500 for 2013, up $500 from 2012.

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