As a financial coach for low income families, I am often asked the question, “Is it possible for low income people to be financially comfortable?” My answer is an unequivocal, 'Yes!' Here's how.
Achieving Financial Comfort
A recent survey by the Canadian Payroll Association reports that nearly half of all Canadian workers are living paycheque to paycheque, so for many people the idea of financial comfort can seem like a fiction. But financial comfort isn't about buying the latest luxuries, rather it's about having the financial resources for life’s milestones and emergencies. And achieving financial comfort means having the right information at the right time, and then being able to make the right financial decisions for you and your future goals based on that information.
That’s not to say that achieving financial comfort is effortless—it requires discipline and a long-term commitment to save money. A low income family with children will typically need to save for:
- Day-to-day expenses
- Emergency fund
- Children’s education
But how does one go about saving money, especially when on a low income? It starts with identifying which saving and investment options are most appropriate for low income families for each item they would like to save for listed above. So let’s take a look at how financial comfort can be achieved for your day-to-day expenses, an emergency fund, your children's education and retirement, and what saving tool would work best.
1. Day-to-day Expenses
For these everyday expenses, a simple chequing account is all that’s needed. This can also be the account where your salary is deposited. Following the oft-repeated saying of “pay yourself first,” it is ideal to first make contributions to your emergency fund, children's education fund and retirement fund before you start pulling money out of your chequing account to cover your day-to-day spending. Otherwise, you might not have anything left to put towards these other saving goals.
But if you start with your savings, this can prompt you to see if you can make cuts to your everyday spending to accommodate your saving goals. Maybe you can cut your grocery bill by buying in bulk with a friend or neighbour; perhaps you can find a cheaper internet or cell phone plan; maybe you can cut your transportation costs by carpooling or using public transit instead of Uber. Whatever the case may be, if your start with your spending first, you might not ever be able to save.
2. Emergency Fund
The importance of saving for a rainy day cannot be over emphasized. For low income families, a regular savings account is the ideal place for putting money that will go toward emergency purposes. The reason is simple—money in a savings account earns a small amount of interest and offers easy withdrawals at no cost. Another advantage is that you can decide how much money you want to contribute to your emergency fund and how often.
There are different types of savings plans offered by banks in Canada, so it is best to get savings account information from various banks prior to opening your emergency fund savings account to determine the best deal. In Canada, interest rates on savings account ranges from 2.3% to less than 1%. This handy interest rate comparison tool of Canadian banks can also help you in the decision-making process.
3. Children’s Education
A Registered Education Savings Plan (RESP) is perfect for saving for your child’s post-secondary education. RESPs are very flexible, and can be used for college or university education in any certified educational institution in or outside of Canada.
You have the option of investing small amounts of money however often you like, and RESP contributions are eligible for a Canada Education Savings Grant (CESG), which is 20% of your total contribution (up to a maximum of $500). Low income families also have the option of a Canada Learning Bond (CLB) worth up to $2,000. All these grants and individual contributions can add up to a sizable amount by the time your child enters a post-secondary institution.
Because there are a variety of RESPs and providers to choose from, it is very important to get the right information before proceeding to invest in one. A community agency can help provide this information.
4. Retirement Fund
The earlier one begins to save for retirement, the more financially comfortable they will by the time they retire. For a low income family, investing in a Tax-Free Savings Account (TFSA) to build up a nest egg makes the most sense because your savings can grow tax-free and there are no withdrawal restrictions, fees or withholding tax, unlike a Registered Retirement Savings Plan (RRSP).
There are different types of TFSAs, of course; some banks have minimum investment policies around how much you can invest and how often, while others allow the contribution amount and contribution intervals to be chosen by you, the individual. (The maximum amount of investment per year is capped at $5,500 for 2018.)
Before opening a TFSA, it's important to speak to your bank about different options and what type of TFSA might be best for you depending on the kinds of savings you're looking to hold in the account. This TFSA comparison tool provides information on various TFSA interest rates offered by different financial institutions as well.
They say slow and steady wins the race, and that’s exactly the idea behind saving for low income families. Start small and slowly build savings over time. With hard work and dedication, financial comfort can be within your reach no matter how much you earn!
Jyothi Venkatesh is Lead Staff for the Financial Empowerment for Newcomers Project, on behalf of the North York Community House.