{"id":212,"date":"2023-08-27T05:25:12","date_gmt":"2023-08-27T09:25:12","guid":{"rendered":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/?post_type=chapter&#038;p=212"},"modified":"2024-11-19T05:40:37","modified_gmt":"2024-11-19T10:40:37","slug":"expense-allocation","status":"publish","type":"chapter","link":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/chapter\/expense-allocation\/","title":{"raw":"Expense Allocation","rendered":"Expense Allocation"},"content":{"raw":"Tracking expenses into categories in your budget will assist you in staying focused on financial goals and support having sufficient funds to meet payment due dates.\r\n\r\nA popular budget allocation methodology is the 50\/30\/20 rule, as outlined in the book <em>All Your Worth: The Ultimate Lifetime Money Plan<\/em> by Elizabeth Warren.\u00a0 The framework for this rule is to apportion 50% of your after-tax income to <em>Needs<\/em>, 30% to <em>Wants<\/em>, and then a 20% allocation to <em>Savings<\/em>.\r\n<ul>\r\n \t<li><strong>50% Needs<\/strong>: This would include expenses that are required to survive or must be paid to keep living the same lifestyle. Examples of needs in this category include rent\/mortgage payments, car payments, groceries, utilities, basic phone\/internet charges, and minimum debt payments.<\/li>\r\n \t<li><strong>30% Wants<\/strong>: <em>Wants<\/em> are considered expenses that are not essential or mandatory. These items are considered optional or in the \u2018nice to have\u2019 category.\u00a0 Eating at a new brunch place over cooking at home, and getting a taxi instead of taking public transit would fall into the <em>Wants<\/em> category.\u00a0 A few examples of <em>Wants<\/em> may include vacations, the latest technology gear, extravagant restaurant dinners, and concert tickets.\u00a0 <em>Wants<\/em> tend to make an individual\u2019s lifestyle more enjoyable and comfortable.<\/li>\r\n \t<li><strong>20% Savings<\/strong>: The savings category is the one channel that is most important for building your financial future.\u00a0 Allocation of the budget to savings entails funds to fill an emergency fund, making contributions to a tax-advantaged account, investing in marketable securities, and making debt payments higher than the minimal monthly payment amount.<\/li>\r\n<\/ul>\r\n<div class=\"textbox textbox--examples\"><header class=\"textbox__header\">\r\n<p class=\"textbox__title\">Example: <strong>50\/30\/20 Allocation<\/strong><\/p>\r\n\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n\r\nGeorge is a junior level tool and die maker apprentice in Ontario, and estimates his gross earnings this year will be $42,500.\u00a0 George\u2019s income tax for the year is approximately $8,500.\u00a0 George strives to allocate the annual salary in the budget as follows:\r\n<table class=\"grid aligncenter\" style=\"border-collapse: collapse;width: 80%\" border=\"0\">\r\n<tbody>\r\n<tr>\r\n<td style=\"width: 516.406px\"><strong>After-Tax Income ($42,500 less $8,500)<\/strong><\/td>\r\n<td style=\"width: 513.406px\"><strong>$34,000<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 516.406px\">Needs (50%)<\/td>\r\n<td style=\"width: 513.406px\">17,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 516.406px\">Wants (30%)<\/td>\r\n<td style=\"width: 513.406px\">10,200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 516.406px\">Savings (20%)<\/td>\r\n<td style=\"width: 513.406px\">6,800<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n<\/div>\r\nThe [pb_glossary id=\"758\"]savings rate[\/pb_glossary] represents the amount of after-tax income dedicated to savings, expressed as a percentage.\u00a0 Following the 50\/30\/20 rule, the savings rate would be loosely calculated as 20%.\u00a0 However, it is recommended to only include items into the savings rate calculation that would build your [pb_glossary id=\"761\"]net worth[\/pb_glossary].\u00a0 Putting funds aside for the next planned vacation or towards a larger vehicle should be placed into the <em>Wants<\/em>\u00a0category.\u00a0 Paying off credit card debt above the minimum payment amount that has already been accumulated should not provide the false impression that one is better-off at saving more.\u00a0 Therefore, most debt repayments are not included in the calculated savings rate.\r\n<div class=\"textbox textbox--examples\"><header class=\"textbox__header\">\r\n<p class=\"textbox__title\">Example: <strong>Savings Rate<\/strong><\/p>\r\n\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n\r\nMatthew has after-tax monthly income of $8,500 working as a heavy equipment operator during a busy construction project with lots of overtime work.\u00a0 Matthew has allocated the following amounts to the monthly budget:\r\n<table class=\"grid aligncenter\" style=\"border-collapse: collapse;width: 80%\" border=\"0\">\r\n<tbody>\r\n<tr>\r\n<td style=\"width: 50%\">Planned vacation to a sunny destination<\/td>\r\n<td style=\"width: 50%\">$300<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 50%\">Down payment for principal residence<\/td>\r\n<td style=\"width: 50%\">$700<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 50%\">Minimum payment amount to the credit card<\/td>\r\n<td style=\"width: 50%\">$200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 50%\">Contribution to RRSP account<\/td>\r\n<td style=\"width: 50%\">$600<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 50%\">Emergency fund<\/td>\r\n<td style=\"width: 50%\">$500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 50%\">Paying down further outstanding credit card balance<\/td>\r\n<td style=\"width: 50%\">$250<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 50%\">Contribution to TFSA account<\/td>\r\n<td style=\"width: 50%\">$400<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 50%\">Savings towards further trades training (microcredential course)<\/td>\r\n<td style=\"width: 50%\">$350<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nMatthew's savings rate for the month is calculated as follows:\r\n\r\n<a href=\"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-content\/uploads\/sites\/2048\/2024\/10\/Chapter-02.3_Savings-Rate.png\"><img class=\"aligncenter size-full wp-image-1281\" src=\"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-content\/uploads\/sites\/2048\/2024\/10\/Chapter-02.3_Savings-Rate.png\" alt=\"Calculation of Savings Rate\" width=\"1036\" height=\"278\" \/><\/a>M<span style=\"font-size: 1em;text-align: initial\">atthew would not include amounts towards a planned vacation or to pay off credit card balances as part of the savings rate determination.\u00a0 Investing into a principal residence may entail the house to increase in value over time and Matthew can make a higher wage with a further microcredential certification course.\u00a0 Both of these savings plans would increase Matthew\u2019s net worth and so are included into the determination of savings rate.<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n&nbsp;\r\n<div class=\"textbox textbox--key-takeaways\"><header class=\"textbox__header\">\r\n<p class=\"textbox__title\">Tax Tip: <strong>Tax-Advantaged Accounts<\/strong><\/p>\r\n\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n\r\nFunds allocated to savings can be put into a tax-advantaged account. Some very popular Canadian tax-advantaged accounts include the [pb_glossary id=\"779\"]Registered Retirement Savings Plan (RRSP)[\/pb_glossary] and the [pb_glossary id=\"781\"]Tax-Free Savings Account (TFSA)[\/pb_glossary].\u00a0 There are many benefits to utilizing a tax-advantaged account, which will be discussed further in <a href=\"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/part\/vii-saving-for-the-future\/\" target=\"_blank\" rel=\"noopener\"><em>Chapter 7 \u2013 Saving for the Future<\/em><\/a>.\u00a0 It may be more beneficial to contribute as much savings as allowed to these tax-advantaged accounts over other savings categories.\r\n\r\n<\/div>\r\n<\/div>\r\n&nbsp;\r\n\r\nIn a Canadian economy with rising housing costs and skyrocketing inflation on basic necessities such as groceries, it is getting much more difficult to apportion only 50% of take-home pay to required needs.\u00a0 Trade apprentices or people who have accumulated some debt may find an allocation of 70\/20\/10 more feasible.\u00a0 Following a 70\/20\/10 apportionment of after-tax income would mean allowing 70% to cover necessities, 20% for comfort items, and dedicating 10% to savings.\u00a0 It is recommended for trade apprentices to seek funding opportunities available to assist in the periods of technical block training or when apprenticeship hours may not be as readily available.\u00a0 <a href=\"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/part\/iv-funding-opportunities-for-apprentices\/\" target=\"_blank\" rel=\"noopener\"><em>Chapter 5 \u2013 Funding Opportunities for Apprentices <\/em><\/a>and<a href=\"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/part\/v-the-world-of-debt\/\" target=\"_blank\" rel=\"noopener\"><em> Chapter 6 \u2013 The World of Debt <\/em><\/a>will outline a number of avenues trade apprentices can take in seeking financial aid.\r\n\r\nA savings rate template (Excel) has been provided that includes common savings items for trades workers.\r\n\r\n<a href=\"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-content\/uploads\/sites\/2048\/2024\/10\/Chapter-02_Savings-Rate-Template.xlsx\">Chapter 02_Savings Rate Template<\/a>\r\n\r\n&nbsp;\r\n\r\n<span style=\"text-decoration: underline\">Building an Emergency Fund<\/span>\r\n\r\nLet\u2019s face it.\u00a0 Life happens and unexpected expenses arise that you may have to deal with.\u00a0 For trades workers, jobs may not be as available in certain unfavourable economic times.\u00a0 It is important to have an emergency fund set aside to pay for these unforeseen circumstances.\u00a0 Situations when this fund may be useful include:\r\n<ul>\r\n \t<li><span style=\"font-size: 1em\">Vehicle break down<\/span><\/li>\r\n \t<li>Need to visit veterinarian to care for pets<\/li>\r\n \t<li>Employment loss or decrease in hours<\/li>\r\n \t<li>Accidents that require uninsured dental care<\/li>\r\n<\/ul>\r\nHaving an available emergency fund lets you cover these sudden expenditures without having to get into increased amounts of debt or use credit cards which have a high-interest rate.\u00a0 It is recommended to have an emergency fund of at least 3-6 months of expected expenditures.\u00a0 Dealing with an emergency is stressful already.\u00a0 Ensuring you can cover any surprising financial situations will provide added peace of mind and an increased financial control mindset.\r\n\r\n&nbsp;\r\n<div class=\"textbox textbox--examples\"><header class=\"textbox__header\">\r\n<p class=\"textbox__title\">Example: <strong>Emergency Fund Amount<\/strong><\/p>\r\n\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n\r\nKelly is building up an emergency fund.\u00a0 Kelly has reviewed her expenditures of the last few months and spends approximately $3,500 each month.\u00a0 Kelly should aim to have an emergency fund of at least $10,500 to $21,000 available.\r\n<ul>\r\n \t<li>3-months ($3,500 x 3 months)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $10,500<\/li>\r\n \t<li>6-months ($3,500 x 6 months)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $21,000<\/li>\r\n<\/ul>\r\n<\/div>\r\n<\/div>\r\nIt is highly recommended to initially build an emergency fund of $1,000 to $1,500 in the beginning stages of savings.\u00a0 The majority of emergencies will fall below this $1,000 threshold, and one will be able to have sufficient available funds if such a necessity arises.\r\n\r\n&nbsp;\r\n<div class=\"textbox textbox--key-takeaways\"><header class=\"textbox__header\">\r\n<p class=\"textbox__title\">Tax Tip: <strong>Interest Income<\/strong><\/p>\r\n\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n\r\nEmergency funds saved inside a high-interest savings account will earn interest income.\u00a0 This interest income is subject to income taxes in the year that it is earned.\u00a0 If the amount earned in the account is at least $50, then the financial institution will issue a tax slip to the individual to be reported on the [pb_glossary id=\"652\"]Income Tax and Benefits Return (T1)[\/pb_glossary].\u00a0 Income taxes owed would be due by the following calendar year April 30th, with the tax return filing.\u00a0 When building an emergency fund, it is important to budget for these upcoming taxes due.\u00a0 Thus, your emergency fund may not have attained your goal balance from just what is showing in the account.\r\n\r\n<\/div>\r\n<\/div>\r\n&nbsp;\r\n<div class=\"textbox textbox--examples\"><header class=\"textbox__header\">\r\n<p class=\"textbox__title\">Example: <strong>Tax on Interest Income<\/strong><\/p>\r\n\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n\r\nKelly has now saved the emergency fund to a $21,000 balance in a high-interest savings account for the entire year earning 5% interest annually.\u00a0 Assuming Kelly\u2019s interest income would be subject to a 35% tax rate, Kelly would have the following emergency fund balance, interest earnings, and tax compliance obligations:\r\n<table class=\"grid aligncenter\" style=\"border-collapse: collapse;width: 85%\" border=\"0\">\r\n<tbody>\r\n<tr>\r\n<td style=\"width: 266.547px\"><strong>Description<\/strong><\/td>\r\n<td style=\"width: 266.969px\"><strong>Amount<\/strong><\/td>\r\n<td style=\"width: 266.969px\"><strong>Balance Account<\/strong><\/td>\r\n<td style=\"width: 266.562px\"><strong>Notes<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 266.547px\">Earning interest income ($21,000 x 5%)<\/td>\r\n<td style=\"width: 266.969px\">$1,050.00<\/td>\r\n<td style=\"width: 266.969px\">$22,050.00 ($21,000 + $1,050)<\/td>\r\n<td style=\"width: 266.562px\">Calendar Year 2024<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 266.547px\">Issued tax slip from financial institution<\/td>\r\n<td style=\"width: 266.969px\">1,050.00<\/td>\r\n<td style=\"width: 266.969px\">$22,050.00 ($21,000 + $1,050)<\/td>\r\n<td style=\"width: 266.562px\">By end of February 2025<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 266.547px\"><\/td>\r\n<td style=\"width: 266.969px\"><\/td>\r\n<td style=\"width: 266.969px\"><\/td>\r\n<td style=\"width: 266.562px\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 266.547px\">Income tax return filed and taxes due ($1,050 x 35%)<\/td>\r\n<td style=\"width: 266.969px\">$375.50<\/td>\r\n<td style=\"width: 266.969px\">$21,674.50 ($22,050 - $375.50)<\/td>\r\n<td style=\"width: 266.562px\">By end of April 2025<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNote: Not taking into consideration any further interest income earned in 2025.\r\n\r\n<\/div>\r\n<\/div>\r\n&nbsp;","rendered":"<p>Tracking expenses into categories in your budget will assist you in staying focused on financial goals and support having sufficient funds to meet payment due dates.<\/p>\n<p>A popular budget allocation methodology is the 50\/30\/20 rule, as outlined in the book <em>All Your Worth: The Ultimate Lifetime Money Plan<\/em> by Elizabeth Warren.\u00a0 The framework for this rule is to apportion 50% of your after-tax income to <em>Needs<\/em>, 30% to <em>Wants<\/em>, and then a 20% allocation to <em>Savings<\/em>.<\/p>\n<ul>\n<li><strong>50% Needs<\/strong>: This would include expenses that are required to survive or must be paid to keep living the same lifestyle. Examples of needs in this category include rent\/mortgage payments, car payments, groceries, utilities, basic phone\/internet charges, and minimum debt payments.<\/li>\n<li><strong>30% Wants<\/strong>: <em>Wants<\/em> are considered expenses that are not essential or mandatory. These items are considered optional or in the \u2018nice to have\u2019 category.\u00a0 Eating at a new brunch place over cooking at home, and getting a taxi instead of taking public transit would fall into the <em>Wants<\/em> category.\u00a0 A few examples of <em>Wants<\/em> may include vacations, the latest technology gear, extravagant restaurant dinners, and concert tickets.\u00a0 <em>Wants<\/em> tend to make an individual\u2019s lifestyle more enjoyable and comfortable.<\/li>\n<li><strong>20% Savings<\/strong>: The savings category is the one channel that is most important for building your financial future.\u00a0 Allocation of the budget to savings entails funds to fill an emergency fund, making contributions to a tax-advantaged account, investing in marketable securities, and making debt payments higher than the minimal monthly payment amount.<\/li>\n<\/ul>\n<div class=\"textbox textbox--examples\">\n<header class=\"textbox__header\">\n<p class=\"textbox__title\">Example: <strong>50\/30\/20 Allocation<\/strong><\/p>\n<\/header>\n<div class=\"textbox__content\">\n<p>George is a junior level tool and die maker apprentice in Ontario, and estimates his gross earnings this year will be $42,500.\u00a0 George\u2019s income tax for the year is approximately $8,500.\u00a0 George strives to allocate the annual salary in the budget as follows:<\/p>\n<table class=\"grid aligncenter\" style=\"border-collapse: collapse;width: 80%\">\n<tbody>\n<tr>\n<td style=\"width: 516.406px\"><strong>After-Tax Income ($42,500 less $8,500)<\/strong><\/td>\n<td style=\"width: 513.406px\"><strong>$34,000<\/strong><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 516.406px\">Needs (50%)<\/td>\n<td style=\"width: 513.406px\">17,000<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 516.406px\">Wants (30%)<\/td>\n<td style=\"width: 513.406px\">10,200<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 516.406px\">Savings (20%)<\/td>\n<td style=\"width: 513.406px\">6,800<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<\/div>\n<p>The <a class=\"glossary-term\" aria-haspopup=\"dialog\" aria-describedby=\"definition\" href=\"#term_212_758\">savings rate<\/a> represents the amount of after-tax income dedicated to savings, expressed as a percentage.\u00a0 Following the 50\/30\/20 rule, the savings rate would be loosely calculated as 20%.\u00a0 However, it is recommended to only include items into the savings rate calculation that would build your <a class=\"glossary-term\" aria-haspopup=\"dialog\" aria-describedby=\"definition\" href=\"#term_212_761\">net worth<\/a>.\u00a0 Putting funds aside for the next planned vacation or towards a larger vehicle should be placed into the <em>Wants<\/em>\u00a0category.\u00a0 Paying off credit card debt above the minimum payment amount that has already been accumulated should not provide the false impression that one is better-off at saving more.\u00a0 Therefore, most debt repayments are not included in the calculated savings rate.<\/p>\n<div class=\"textbox textbox--examples\">\n<header class=\"textbox__header\">\n<p class=\"textbox__title\">Example: <strong>Savings Rate<\/strong><\/p>\n<\/header>\n<div class=\"textbox__content\">\n<p>Matthew has after-tax monthly income of $8,500 working as a heavy equipment operator during a busy construction project with lots of overtime work.\u00a0 Matthew has allocated the following amounts to the monthly budget:<\/p>\n<table class=\"grid aligncenter\" style=\"border-collapse: collapse;width: 80%\">\n<tbody>\n<tr>\n<td style=\"width: 50%\">Planned vacation to a sunny destination<\/td>\n<td style=\"width: 50%\">$300<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 50%\">Down payment for principal residence<\/td>\n<td style=\"width: 50%\">$700<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 50%\">Minimum payment amount to the credit card<\/td>\n<td style=\"width: 50%\">$200<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 50%\">Contribution to RRSP account<\/td>\n<td style=\"width: 50%\">$600<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 50%\">Emergency fund<\/td>\n<td style=\"width: 50%\">$500<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 50%\">Paying down further outstanding credit card balance<\/td>\n<td style=\"width: 50%\">$250<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 50%\">Contribution to TFSA account<\/td>\n<td style=\"width: 50%\">$400<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 50%\">Savings towards further trades training (microcredential course)<\/td>\n<td style=\"width: 50%\">$350<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Matthew&#8217;s savings rate for the month is calculated as follows:<\/p>\n<p><a href=\"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-content\/uploads\/sites\/2048\/2024\/10\/Chapter-02.3_Savings-Rate.png\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-full wp-image-1281\" src=\"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-content\/uploads\/sites\/2048\/2024\/10\/Chapter-02.3_Savings-Rate.png\" alt=\"Calculation of Savings Rate\" width=\"1036\" height=\"278\" srcset=\"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-content\/uploads\/sites\/2048\/2024\/10\/Chapter-02.3_Savings-Rate.png 1036w, https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-content\/uploads\/sites\/2048\/2024\/10\/Chapter-02.3_Savings-Rate-300x81.png 300w, https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-content\/uploads\/sites\/2048\/2024\/10\/Chapter-02.3_Savings-Rate-1024x275.png 1024w, https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-content\/uploads\/sites\/2048\/2024\/10\/Chapter-02.3_Savings-Rate-768x206.png 768w, https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-content\/uploads\/sites\/2048\/2024\/10\/Chapter-02.3_Savings-Rate-65x17.png 65w, https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-content\/uploads\/sites\/2048\/2024\/10\/Chapter-02.3_Savings-Rate-225x60.png 225w, https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-content\/uploads\/sites\/2048\/2024\/10\/Chapter-02.3_Savings-Rate-350x94.png 350w\" sizes=\"auto, (max-width: 1036px) 100vw, 1036px\" \/><\/a>M<span style=\"font-size: 1em;text-align: initial\">atthew would not include amounts towards a planned vacation or to pay off credit card balances as part of the savings rate determination.\u00a0 Investing into a principal residence may entail the house to increase in value over time and Matthew can make a higher wage with a further microcredential certification course.\u00a0 Both of these savings plans would increase Matthew\u2019s net worth and so are included into the determination of savings rate.<\/span><\/p>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<div class=\"textbox textbox--key-takeaways\">\n<header class=\"textbox__header\">\n<p class=\"textbox__title\">Tax Tip: <strong>Tax-Advantaged Accounts<\/strong><\/p>\n<\/header>\n<div class=\"textbox__content\">\n<p>Funds allocated to savings can be put into a tax-advantaged account. Some very popular Canadian tax-advantaged accounts include the <a class=\"glossary-term\" aria-haspopup=\"dialog\" aria-describedby=\"definition\" href=\"#term_212_779\">Registered Retirement Savings Plan (RRSP)<\/a> and the <a class=\"glossary-term\" aria-haspopup=\"dialog\" aria-describedby=\"definition\" href=\"#term_212_781\">Tax-Free Savings Account (TFSA)<\/a>.\u00a0 There are many benefits to utilizing a tax-advantaged account, which will be discussed further in <a href=\"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/part\/vii-saving-for-the-future\/\" target=\"_blank\" rel=\"noopener\"><em>Chapter 7 \u2013 Saving for the Future<\/em><\/a>.\u00a0 It may be more beneficial to contribute as much savings as allowed to these tax-advantaged accounts over other savings categories.<\/p>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<p>In a Canadian economy with rising housing costs and skyrocketing inflation on basic necessities such as groceries, it is getting much more difficult to apportion only 50% of take-home pay to required needs.\u00a0 Trade apprentices or people who have accumulated some debt may find an allocation of 70\/20\/10 more feasible.\u00a0 Following a 70\/20\/10 apportionment of after-tax income would mean allowing 70% to cover necessities, 20% for comfort items, and dedicating 10% to savings.\u00a0 It is recommended for trade apprentices to seek funding opportunities available to assist in the periods of technical block training or when apprenticeship hours may not be as readily available.\u00a0 <a href=\"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/part\/iv-funding-opportunities-for-apprentices\/\" target=\"_blank\" rel=\"noopener\"><em>Chapter 5 \u2013 Funding Opportunities for Apprentices <\/em><\/a>and<a href=\"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/part\/v-the-world-of-debt\/\" target=\"_blank\" rel=\"noopener\"><em> Chapter 6 \u2013 The World of Debt <\/em><\/a>will outline a number of avenues trade apprentices can take in seeking financial aid.<\/p>\n<p>A savings rate template (Excel) has been provided that includes common savings items for trades workers.<\/p>\n<p><a href=\"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/wp-content\/uploads\/sites\/2048\/2024\/10\/Chapter-02_Savings-Rate-Template.xlsx\">Chapter 02_Savings Rate Template<\/a><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"text-decoration: underline\">Building an Emergency Fund<\/span><\/p>\n<p>Let\u2019s face it.\u00a0 Life happens and unexpected expenses arise that you may have to deal with.\u00a0 For trades workers, jobs may not be as available in certain unfavourable economic times.\u00a0 It is important to have an emergency fund set aside to pay for these unforeseen circumstances.\u00a0 Situations when this fund may be useful include:<\/p>\n<ul>\n<li><span style=\"font-size: 1em\">Vehicle break down<\/span><\/li>\n<li>Need to visit veterinarian to care for pets<\/li>\n<li>Employment loss or decrease in hours<\/li>\n<li>Accidents that require uninsured dental care<\/li>\n<\/ul>\n<p>Having an available emergency fund lets you cover these sudden expenditures without having to get into increased amounts of debt or use credit cards which have a high-interest rate.\u00a0 It is recommended to have an emergency fund of at least 3-6 months of expected expenditures.\u00a0 Dealing with an emergency is stressful already.\u00a0 Ensuring you can cover any surprising financial situations will provide added peace of mind and an increased financial control mindset.<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox textbox--examples\">\n<header class=\"textbox__header\">\n<p class=\"textbox__title\">Example: <strong>Emergency Fund Amount<\/strong><\/p>\n<\/header>\n<div class=\"textbox__content\">\n<p>Kelly is building up an emergency fund.\u00a0 Kelly has reviewed her expenditures of the last few months and spends approximately $3,500 each month.\u00a0 Kelly should aim to have an emergency fund of at least $10,500 to $21,000 available.<\/p>\n<ul>\n<li>3-months ($3,500 x 3 months)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $10,500<\/li>\n<li>6-months ($3,500 x 6 months)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $21,000<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<p>It is highly recommended to initially build an emergency fund of $1,000 to $1,500 in the beginning stages of savings.\u00a0 The majority of emergencies will fall below this $1,000 threshold, and one will be able to have sufficient available funds if such a necessity arises.<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox textbox--key-takeaways\">\n<header class=\"textbox__header\">\n<p class=\"textbox__title\">Tax Tip: <strong>Interest Income<\/strong><\/p>\n<\/header>\n<div class=\"textbox__content\">\n<p>Emergency funds saved inside a high-interest savings account will earn interest income.\u00a0 This interest income is subject to income taxes in the year that it is earned.\u00a0 If the amount earned in the account is at least $50, then the financial institution will issue a tax slip to the individual to be reported on the <a class=\"glossary-term\" aria-haspopup=\"dialog\" aria-describedby=\"definition\" href=\"#term_212_652\">Income Tax and Benefits Return (T1)<\/a>.\u00a0 Income taxes owed would be due by the following calendar year April 30th, with the tax return filing.\u00a0 When building an emergency fund, it is important to budget for these upcoming taxes due.\u00a0 Thus, your emergency fund may not have attained your goal balance from just what is showing in the account.<\/p>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<div class=\"textbox textbox--examples\">\n<header class=\"textbox__header\">\n<p class=\"textbox__title\">Example: <strong>Tax on Interest Income<\/strong><\/p>\n<\/header>\n<div class=\"textbox__content\">\n<p>Kelly has now saved the emergency fund to a $21,000 balance in a high-interest savings account for the entire year earning 5% interest annually.\u00a0 Assuming Kelly\u2019s interest income would be subject to a 35% tax rate, Kelly would have the following emergency fund balance, interest earnings, and tax compliance obligations:<\/p>\n<table class=\"grid aligncenter\" style=\"border-collapse: collapse;width: 85%\">\n<tbody>\n<tr>\n<td style=\"width: 266.547px\"><strong>Description<\/strong><\/td>\n<td style=\"width: 266.969px\"><strong>Amount<\/strong><\/td>\n<td style=\"width: 266.969px\"><strong>Balance Account<\/strong><\/td>\n<td style=\"width: 266.562px\"><strong>Notes<\/strong><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 266.547px\">Earning interest income ($21,000 x 5%)<\/td>\n<td style=\"width: 266.969px\">$1,050.00<\/td>\n<td style=\"width: 266.969px\">$22,050.00 ($21,000 + $1,050)<\/td>\n<td style=\"width: 266.562px\">Calendar Year 2024<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 266.547px\">Issued tax slip from financial institution<\/td>\n<td style=\"width: 266.969px\">1,050.00<\/td>\n<td style=\"width: 266.969px\">$22,050.00 ($21,000 + $1,050)<\/td>\n<td style=\"width: 266.562px\">By end of February 2025<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 266.547px\"><\/td>\n<td style=\"width: 266.969px\"><\/td>\n<td style=\"width: 266.969px\"><\/td>\n<td style=\"width: 266.562px\"><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 266.547px\">Income tax return filed and taxes due ($1,050 x 35%)<\/td>\n<td style=\"width: 266.969px\">$375.50<\/td>\n<td style=\"width: 266.969px\">$21,674.50 ($22,050 &#8211; $375.50)<\/td>\n<td style=\"width: 266.562px\">By end of April 2025<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Note: Not taking into consideration any further interest income earned in 2025.<\/p>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<div class=\"glossary\"><span class=\"screen-reader-text\" id=\"definition\">definition<\/span><template id=\"term_212_758\"><div class=\"glossary__definition\" role=\"dialog\" data-id=\"term_212_758\"><div tabindex=\"-1\"><p>the percentage of after-tax income that is put towards savings<\/p>\n<\/div><button><span aria-hidden=\"true\">&times;<\/span><span class=\"screen-reader-text\">Close definition<\/span><\/button><\/div><\/template><template id=\"term_212_761\"><div class=\"glossary__definition\" role=\"dialog\" data-id=\"term_212_761\"><div tabindex=\"-1\"><p>the value of net assets that an individual has calculated by total assets less total liabilities<\/p>\n<\/div><button><span aria-hidden=\"true\">&times;<\/span><span class=\"screen-reader-text\">Close definition<\/span><\/button><\/div><\/template><template id=\"term_212_779\"><div class=\"glossary__definition\" role=\"dialog\" data-id=\"term_212_779\"><div tabindex=\"-1\"><p>a retirement savings and investment plan that individuals can open an account for and contribute to.\u00a0 Deductible contributions can be used to reduce your income tax.<\/p>\n<\/div><button><span aria-hidden=\"true\">&times;<\/span><span class=\"screen-reader-text\">Close definition<\/span><\/button><\/div><\/template><template id=\"term_212_781\"><div class=\"glossary__definition\" role=\"dialog\" data-id=\"term_212_781\"><div tabindex=\"-1\"><p>a registered savings account that individuals 18 and over with a valid Social Insurance Number (SIN) can open to set money aside tax-free throughout their lifetime<\/p>\n<\/div><button><span aria-hidden=\"true\">&times;<\/span><span class=\"screen-reader-text\">Close definition<\/span><\/button><\/div><\/template><template id=\"term_212_652\"><div class=\"glossary__definition\" role=\"dialog\" data-id=\"term_212_652\"><div tabindex=\"-1\"><p>the Canadian tax return that individuals complete every year to calculate whether they owe tax on their income.\u00a0 A return must also be completed and submitted to Canada Revenue Agency to receive federal and provincial or territorial benefits and credits.<\/p>\n<\/div><button><span aria-hidden=\"true\">&times;<\/span><span class=\"screen-reader-text\">Close definition<\/span><\/button><\/div><\/template><\/div>","protected":false},"author":1780,"menu_order":3,"template":"","meta":{"pb_show_title":"on","pb_short_title":"Expense 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