Fact Sheet: Budgeting, Banking and Savings

Information for Newcomers

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Budgeting
It may cost more to get started in Canada than you expect. Although Canadian salaries are relatively high, so are costs. A budget, which is a personal or family plan to manage your money, can help you plan your expenses until your next pay cheque. Find out how to plan your budget.

Banking information
Banks and other financial institutions such as trust companies, caisses populaires and credit unions provide a safe place to keep your money. They also offer other services to help you manage your money. Banks also provide loans and mortgages. Find out more about banks.

Saving your money
Most people try to save some money each month, usually in a savings account at a financial institution. There are many reasons to save your money. Find out more.

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Budgeting

It may cost more to get started in Canada than you expected. Although Canadian salaries are relatively high, so are costs. A budget, which is a personal or family plan to manage your money, can help you plan your expenses until your next pay cheque. Careful budgeting will help you avoid borrowing money, which you will have to repay with interest.

Preparing a Budget

First, determine how much take-home pay you earn. This is the amount of your paycheque after taxes and other deductions. Then look at what you spend.

The money you spend will fall into one of three general areas:

1. Taxes and other items that you must pay;
2. Necessary expenses such as food, shelter, clothing and transportation; and
3. Luxuries.

How Much Is Your Take-Home Pay?

Your take-home pay is what you earn after you’ve paid such things as:

• Income taxes
• Canada Pension Plan or Quebec Pension Plan
• Employment Insurance
• Union dues
• Contributions to a retirement or pension plan
• Any other deductions from your monthly paycheque

Most employers are required to make deductions from your pay to cover these items. Depending on how much you earn, this could reduce your pay by as much as 25 to 35 percent of your total income.

If you are self-employed, you are required to set aside about 30 percent of your income in a separate account. You must give this money to the government for taxes, employment insurance and pension contributions. You can find out more about what you have to do if you are self-employed by reading the Guide for Canadian Small Businesses.

The important thing is to plan your budget based on your take-home pay, not your pay before taxes and deductions.

The Things You Need

There are certain things, such as food and a place to live, that you can’t do without. These are necessities. The most important of these are:

• A place to live
• Heating and utilities
• Food
• Clothing
• Transportation

You can save on necessities by living in inexpensive housing, shopping for food carefully, buying second-hand clothing, or walking, riding a bicycle or taking a bus rather than a car or taxi, but you can’t live without them. You may find at first that necessities take up as much as two-thirds of your budget.

The Things You Want

The things you want, but don’t absolutely need, are known as luxuries. You may not have a lot of money left over for luxuries after you buy all the things you need. Most people can’t afford very many luxuries, and have to make careful choices about how they spend their money. For example, if you must set aside money for education or medical care, there will be less for items such as a car, gifts or long-distance phone calls.

Income Tax

Most employers will deduct federal and provincial taxes from your pay cheque. Each year, you must file an income tax return. On your income tax return, you list your income, deductions and tax credits. If you paid too much tax, you will get money back. If you did not pay enough, you will have to pay more.

By completing an income tax return, the federal government can determine if you qualify to receive the Child Tax Benefit and the Goods and Services Tax (GST) credit.

Banking

Banks and other financial institutions, such as trust companies, caisses populaires and credit unions provide:

1. a safe place to keep your money;
2. services to help you manage your money; and
3. loans and mortgages.

Financial institutions are businesses. They do not just hold your money in a safe place. They also make money. They do this by:

1. Investing your money. They pay you interest for this.
2. Lending you money. You pay them interest for this.
3. Providing you with credit, usually in the form of a credit card.

Opening an Account

You should open a bank account soon after you arrive in Canada. You will need a Social Insurance Number and some other kind of identification such as a passport or your Permanent Resident Card. You may also need something that proves where you live, such as a telephone bill or a driver’s licence.

There are many different types of bank accounts depending on your needs. Some will let you write cheques. Most will include a bank card. With a bank card, you can withdraw money from an automated teller machine (ATM). An ATM is a bank machine that is open 24 hours a day. You can also use a bank card to buy things at most stores, so that you don’t have to carry large amounts of cash.

With many accounts, you can use the Internet to do your banking and pay bills.

Credit Cards

A credit card allows you to buy things and then pay for them over a period of time. For example, if you buy a sofa or a bed for $500, you can repay the credit card company over several months.

You will get a statement from your credit card company every month. There will be a minimum amount that you will have to pay. It’s usually quite a lot lower than the full amount you owe. If you only pay the minimum amount, you will be charged interest. If you pay the full amount, most credit card companies will not charge interest.

The interest rate on the unpaid balance of your credit card is usually a lot higher than the interest rate on a normal loan. You can save money by paying your full balance every month.

Credit cards are available from financial institutions, department stores, gas stations and many other stores.

Financial Institutions

Financial institutions provide:

• Safety. The federal government makes rules that all banks and most trust companies must follow. The government watches financial institutions very carefully to make sure that your money is safe. The provinces make the rules for credit unions and caisses populaires, as well as some trust companies. All financial institutions that accept deposits, except caisses populaires and credit unions, must be members of the Canada Deposit Insurance Corporation (CDIC). The CDIC provides insurance for eligible deposits to a maximum of $100,000.
• Advice. Banks will help you choose the kind of account, loan or mortgage that is best for you. Their advice is usually good, but you should shop around, because there are many different kinds of accounts, loans, mortgages and investments. Ask many questions, and don’t sign any agreement until you are sure that you understand what it means. If you aren’t sure, ask someone you trust for help, or get help from an organization that helps immigrants.
• Services. All financial institutions offer packages of financial services. You should only buy the services you need. For example, a bank may offer you an account that includes travellers’ cheques, international credit cards and foreign banking services. They will probably charge more for each of these services, even if you don’t use them.

Borrowing Money

There are many good reasons to borrow money, such as going to college or university to improve your education, opening or expanding a business, or buying a car or a house.

When you borrow money, make sure you understand how and when you have to pay it back. Can you make extra payments? What happens if you miss a payment? How much interest will be charged? Is there a penalty for paying off the loan early? What will the interest rate be?

If you are having trouble understanding any information about a loan, ask someone you trust for help, or get help from an organization that helps immigrants.

Saving Money

Most people budget to save some money each month, usually in a savings account in a bank, trust company, caisse populaire or credit union. You can save for a number of reasons:

1. Major purchases. Many people don’t like being in debt, and would rather save for a major purchase before making it. If you have to borrow money for a house, a car or to start a small business, you will probably have to make some kind of a down payment, perhaps as much as 20%, from your savings.
2. Retirement. Many people start saving for their retirement when they are in their 20s or 30s. You can save for your retirement by contributing to a registered retirement savings plan, or an RRSP. Many people contribute to such a plan at work through payroll deductions, especially if they do not have a pension plan. Your bank or financial institution can tell you more about RRSPs.
3. Emergencies. It’s a good idea to put aside some money for an emergency, such as an accident or illness, or in case you lose your job or source of income. Most financial advisors suggest you try to keep three months’ salary in the bank.
4. Long-term needs. You may want to start saving for college or university for your children or grandchildren. In Canada, post-secondary education is expensive, and is not paid for by the government.