Around the holidays we’re usually focused on how much money is going out of our accounts, not into them. Whether it’s a year-end bonus from work or a $20 in your holiday card from dear Aunt Ethel, investing any extra funds you receive during the holidays is a wise move. It can help you instantly remove some of the stress from seasonal over-spending and set you up for future financial success all year round.
You might be tempted to treat yourself, but come January you’ll have had enough treats. It’s normal to have good intentions but be confused about what to tackle first. Just like that ugly sweater party you went to, everyone is different and getting the most from your money will vary depending on your age and financial situation.
This step-by-step list, by priority, shows you how to invest your holiday cash no matter how large or small it might be. It’s the best gift you can give yourself.
1. Got a credit hangover? Pay off high-interest debt first
Canadians have some of the highest consumer debt in the world. Around the end of the year, many of us pull out our credit cards to cover expenses and do our best to bring joy to the season. While that short-term holiday high feels good in the moment, high-interest debt is a black hole that drastically reduces our ability to save up in the future. It’s financial coal, and nobody wants coal.
Your first step, no matter what, is to pay off as much of your high-interest debt as possible. The benefits are two-fold: it lowers your current debt load so you’ll pay fewer interest charges, and it frees up your future incoming cash to be invested in ways that will earn money for you – instead of your credit card company.
This might sting a little, but make a list of all of your debts and their corresponding interest rates. Typically, retailer credit cards have the highest while those from a bank or other financial institution can be lower. Don’t look at the minimum monthly amount or the interest being added — look at the principal and the total amount. Any account with a total balance under $500 should be paid off completely if you can. That takes it totally off your plate and is one less thing to think about. Then, begin to pay off as much of the principal as you can for the accounts with the highest interest rate and work your debt off from there. The faster you can do this, the better.
2. Living paycheque to paycheque? Add to your emergency fund
When it comes to financial needs, lots of people think of RRSPs or other long-term investments. Those are very important, and you should definitely have them, but not if you don’t have an easily accessible emergency fund ready to go in case of, well, an emergency. From getting unexpectedly laid off to a budget-busting home repair you didn’t plan for, your emergency fund is a crucial buffer between being financially resilient to life’s surprises or being sidetracked by them.
Traditional wisdom says to have enough saved up to cover all of your expenses for three months, but the more modern rule of thumb is to have enough saved up for six. Make a budget, be brutally honest with yourself (your fixed expenses like rent and insurance come first, unnecessary shopping trips come last) and figure out how much you’d need to live for a single month. Multiply that by six, and that’s how much you should aim to have in a high-interest savings account that you can use at any time. You’ll probably be shocked, it will feel like a lot, but it’s one of the smartest things you can do for yourself and your family.
3. Ready to build your savings? Add to your TFSA
If you’ve got your debt paid off and a six-month emergency fund, then congrats — you’re ahead of the game.
A TFSA is your financial-planning best friend, especially if you’re thinking of accessing the money in one to five years. It allows you to save money, grow it tax-free, and remove it at any time without penalty. This makes it the perfect vehicle for anyone saving for a mortgage, other major expenses, or who just don’t want their money tied up in a more restrictive long-term RRSP.
Despite a TFSA’s earning power and versatility, most Canadians don’t contribute as much as they could. Depending on how you’ve put into or taken from a TFSA in the past, you might have eligible contribution room as high as $63,500. Most of us don’t have that just lying around, so not maxing out your TFSA is pretty understandable. But if you’ve got some newfound holiday cash, this is your next priority on where to put it.
4. Got kids? Add to an RESP
Lots of priorities shift when you begin to save for your children and not only yourself. Like the power of a TFSA, a government-funded RESP is an absolute no-brainer when it comes to saving up for your child’s education. Since you’ve got a fairly pre-determined path to when you’ll pull the investment out based on your child’s age, this is one case where, if your children are quite young, even small amounts of invested cash will end up going a very long way.
If you’re looking to limit the number of physical presents your children receive but want to let your friends and family give them gifts, letting everyone know how they can contribute financially to their RESPs is a great way to build up their funds while letting family members give a meaningful gift to your little ones.
5. Thinking about retirement? Add to your RRSP
Bulking up your RRSP is never a bad idea. If you’re financially stable or have extra cash to put away, an RRSP is the perfect companion to a TFSA and will serve you well no matter how much you can contribute. As with many investments, time is your friend, so the earlier you can begin the better.
That said, be sure to keep priorities in mind. There’s less point to building up your RRSP if you’re also giving away money to managing the slippery slope of high-interest rate debt. Pay off debt first, and then use all the money you’ll now have available (including additional funds you’ll have in the future because you won’t be paying off interest charges) to add to your RRSP when the time is right.
6. Want to earn while doing good? Invest with ESG in mind
If you pay off your credit cards each month, your TFSA is maxed, your RRSPs are on track to meet your retirement goals, and you’ve got extra cash left to invest however you like, then choosing where to put the power of your money based on Environmental, Social and Governance (ESG) factors could be for you.
ESG factors help you, and your investment advisors, know which companies operate in a way that aligns with your values. From gender parity on corporate boards to how they measure real-world environmental impact, you can choose to grow your portfolio while also supporting companies that proactively make the world a better place. And that’s a gift to us all, no matter what time of year it is.
Amanda Ashford is a Brand & Communications consultant building brands with purpose and using business as a force for good. As a global traveller, Amanda is constantly inspired by the sounds, scenes and stories found around the world, and our shared passion for purpose that connects us all.
Amanda Ashford is a paid spokesperson of Sonnet Insurance.