is an exciting life event. It also gives you the opportunity to take a look at your financial situation and assess your objectives. It’s a time when you have to make decisions about a number of financial matters that concern you.
Above all, establishing a budget can make you aware of your real income and expenses and give you an overview of your financial situation.
One of the first questions concerns management of debt, which is often related to your education. You may automatically think that repaying debt before doing anything else is the best option. But if an investment gives you the opportunity to earn a return that exceeds the interest rate on your student loan – which is often the case – investing becomes a more attractive option. In addition, you must take into consideration that interest on student loans is subject to a Quebec tax credit.
You can choose from several investment vehicles: an RRSP and a TFSA are both advantageous investment options but with quite different characteristics. Obviously, in an ideal world, it would be preferable to maximize both options; but if you can’t do that, which one should you choose? It all depends on your tax rate. If you plan to have a lower marginal tax rate in retirement than you do today – as is the case for most people – then you should emphasize an RRSP.
In addition, other savings solutions may be available through your employer. A group RRSP, a deferred profit-sharing plan (DPSP) and a pension fund may also be attractive choices for your savings.
Along with debt management and an investment strategy, it would be prudent for you to create an emergency fund by opening an account for that purpose. The amount should cover three to six months of living expenses in the event of an unforeseen financial situation or a sudden loss of income, especially if you are self-employed.
If you opt to become self-employed, other important factors have to be taken into account. In addition to being responsible for paying the total amount of your QPP contributions, you will have no employment insurance coverage and you will have to save for your retirement. Even so, some expenses related to the operation of your business are tax-deductible.