Step 1: Get rid of your high-interest debt
Do you have any debt with an interest rate above 7% or more? If you have credit-card debt, you likely do. Pay it down first.
Why? Any returns you make from investing will probably be less than the interest you're paying on that debt. Which sort of defeats the whole purpose.
Step 2: Build an emergency fund
Okay, you've paid off your high-interest debt. Time to invest, right? Almost. First, stash away three to six months of living expenses in a savings account or somewhere else low risk.
That way, if you get laid off or your car has issues, you'll have enough cash to ride things out without taking on more high-interest debt. Which would put you back at step one.
Step 3: Maximize your employer match
At last — it's time to invest. So where do you begin? If your employer matches contributions to a Group Retirement Savings Plan (GRSP), start there.
You can contribute as much as 18% of your income, and employers typically match 3–6%. For example: if you made $60K and your company matches 5% of your salary, your company will give you an extra $3,000 in income to put toward retirement. Not taking advantage is like refusing 5% of your salary.
Step 4: Max out your tax-advantaged accounts
The Canadian government offers two special investment accounts as an incentive to save for retirement. An RRSP reduces your declarable income so that you pay less tax now, while with a TFSA (Tax Free Savings Account) your proceeds aren't taxed, so you pay less tax later.
If you invest outside these accounts, you're voluntarily paying more taxes.
Step 5: Pay down low-interest debts
Once your TFSA or RRSP is maxed out, consider paying down your lower-interest debts, like a mortgage or student loans. These debts still have interest that can negate your investment gains.
It's hard to be super prescriptive about whether this is the right move for you — it depends on your debt situation — but definitely look at your interest rates and your investment expectations.
Step 6: Invest in yourself or in your children
If you've reached step six, congratulations. Now you can plan what to do with the rest of your money. You can put some in a personal investment account, say. Or save for a new house. Or sock away money for your children's college or university education.
