Nearly half of Canadians — 48 percent — say that lack of income is their biggest obstacle when it comes to saving and investing, according to a recent Ipsos Reid poll commissioned by Investor Education Fund. But with the right budgeting and planning strategies, financial experts say saving and investing are both possible for low-income earners.
“Low income is no excuse for not saving,” says Calgary certified financial planner Kevin MacLeod, founder of MoneyAdvisor.ca. “I’ve met many individuals and families over the years that have one income or two low incomes and they saved a large portion of their income; I have met others that have enormous income and nothing left at the end of every month and they live pay cheque to pay cheque. It’s simply a matter of choice on how you want to live.”
DWM Securities Inc. certified financial planner Bettina Schnarr says it’s common for people to believe they’re too poor to save or invest.
“I often hear the comment from prospective clients: I’ll come and see you when I’m rich or I have a million dollars.’ And I always respond: “You should see me now so that I can help you to get there,’” the Surrey, B.C.-based Schnarr says.
In a separate study conducted by Scotiabank, 64 per cent of Canadians say affordability is the number one reason why they can't invest. Only 39 per cent of those surveyed said they would contribute to an registered retirement savings plan (RRSP) by the March 1st deadline.
With little money to go around, how can low-income earners start to invest and save?
Pay yourself first
“Have savings automatically deducted from your pay cheque or your bank account on the day you get paid,” MacLeod says.
A good rule of thumb is to save 10 per cent of your income, but you can start with as little as $25 a month, Schnarr says.
“If you start by setting the amount too high, it can be discouraging if you need to stop it and many people may opt not to restart afterward. It’s easier to eventually raise that minimum amount; one way is to raise it as wages increase, which hopefully they will," she says.
Schnarr suggests consulting a financial advisor to see whether putting money into an RRSP or TFSA best suits an individual’s circumstances. “The savings should be in something where the money is still accessible but earmarked for long-term savings. For low-income earners it’s probably best to set the money aside in a TFSA.
“It’s true that you should pay yourself first,” Schnarr adds. “You’re saving for your future self and that should be an obligation just like any other bill.”
Sign up for company plans
“Make sure you participate in your employer’s savings plans if they match any of your [RRSP] contributions,” MacLeod says. “Many people do not, and they’re giving up free money.”
Attach a goal to your savings to determine how to invest
Setting a goal with a realistic timeline allows savers to work towards a concrete dollar amount. Goal setting also helps to put the seemingly-daunting task of retirement savings into perspective.
“If you’re saving to buy a home, how many years will you need to save? Should you use your RSPs for the first-time home buyer? Or, if your income is below $35,000, should you be using your tax-free savings account for future goals? Everyone is different,” MacLeod notes.
Calculate your risks
“Don’t take risks with money that will be used for your goal within three years,” MacLeod adds. “Goals with a timeline of less than five years should have investments that are very conservative. Goals that require you to save for more than five years, such as retirement, should have some risk attached to the investment — a good, balanced mutual fund, for example -- so that there is some expectation of keeping up with or exceeding inflation.
“Do not take excessive risks or gamble your money on get-rich quick scams,” MacLeod cautions. “And watch out for investments that sound too good to be true.”