RRSP, TFSA or FHSA? Young Canadians looking to invest face wide range of options

Sammy Hudes, The Canadian Press
RRSP, TFSA or FHSA? Young Canadians looking to invest face wide range of options

TORONTO — One of Rebecca Clancey’s friends suggested she put $400 a month into an RRSP. Another urged her to store all savings in a tax-free savings account.

For the early-career Halifax high school teacher looking to save for a wedding and a home down payment with her partner, it was all pretty confusing.

“I was kind of like, ‘Well, I don’t know what I’m going to do,'” said Clancey, 30. “Like, ‘I guess I have to figure this out myself.’ But I didn’t even know what questions to ask.”

Clancey turned to Laura Whiteland, a certified financial planner at Inclusive Financial Planning in Truro, N.S., to explore her options. She admitted that meant having some difficult conversations on what was realistic given her financial situation.

“When you’re first starting out after you’ve graduated, either high school or university, and you have your first full-time job, just everything is so insecure,” Clancey said.

“It’s just constant anxiety around money all the time and you just never feel like you know enough. There’s always so many words and numbers flying around and you just feel totally lost.”

If you’re a young person thinking about making your first investment but not sure where to begin, you’re not alone, Whiteland said.

“I think the hardest thing for some people is just kind of getting into the habit of doing it,” said Whiteland, adding that “differentiating between what all the accounts do and what they’re actually for” is no easy task for a first-timer.

“Sometimes you see, especially with younger people, they almost get kind of paralysis with it because it’s so much to take in and understand and you don’t know how all these accounts work together.”

A survey released last month by Co-operators, a Canadian financial services provider, found that just one-quarter of Canadians aged 18 to 44 feel confident in their ability to choose investment opportunities, while 38 per cent said they don’t know everything they need to about their investing options.

“The challenges of today’s economic climate, including high interest rates and cost of living, are intensified by the knowledge gap that exists for young Canadians,” Co-operators chief experience officer Emmie Fukuchi said in a news release.

Further complicating matters is the sheer number of options available these days, said Whiteland, with the choice of contributing money toward a registered retirement savings plan (RRSP), tax-free savings account (TFSA), or the new first home savings account (FHSA).

“Twenty-five years ago, Canada Savings Bonds and RRSPs were the main vehicles people used. That was a pretty binary choice between short-term and long-term,” she said. “Now, it’s a lot more nuanced. There’s a lot more tax structuring that goes into it that people don’t necessarily think about.”

Caval Olson-Lepage, a certified financial planner and growth and engagement manager at Collabria Financial Services, said those decisions can be “overwhelming,” especially given how little financial learning is prioritized in most education systems across Canada.

She said it’s important to figure out individual goals and circumstances before deciding which options are best suited for you.

“What’s your purpose for saving? If you are saving for your first house, well, then the first home savings account is definitely something you want to look into,” said Olson-Lepage, who is based in Saskatoon.

“However, if you’re looking for that longer term retirement planning, you’re going to want to dig into whether an RRSP or a TFSA is going to be a better option.”

Olson-Lepage said another big factor to consider is whether it’s better to pay off debt, such as student loans, before saving money.

“I always like to ask people, ‘Does carrying debt make you uncomfortable?’ because if it makes you uncomfortable, then we should be focusing on paying it off,” she said.

“Another determination is, ‘Is the interest I’m being charged on my debt higher than the interest I could possibly earn on my investments?'”

While financial decisions can be stressful, Whiteland said the good news for young people is that there’s more room for error when starting to invest at an early age.

“But you want to make sure you deal with those errors sooner rather than later,” she cautioned, adding diversification is key to minimizing risk.

“The big thing for anyone is just … making sure you’re getting the most out of every dollar because we’re in challenging times. There’s a lot going on, there’s a lot of complication and making sure that you’re doing the best you can with what you have is going to get you a lot further than just guessing and feeling it out on your own.”

This report by The Canadian Press was first published June 6, 2023.

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