When managing your finances, consider things such as paying down debt, establishing an emergency fund, saving for the future and creating a fund for discretionary costs, also known as a fun or sinking fund.
1. Build an emergency fund
Before the fun fund, Lichtman says to prioritize an emergency fund. An emergency fund is strictly for worst-case scenarios such as job loss, unexpected car or home repairs (not renovations), or medical, dental and vet bills. Most financial experts recommend saving three to six months of expenses. Experts suggest three months of savings if job security is high, but try for six months if you’re self-employed or your job security is uncertain.
2. Pay off high-interest debt
Next, it’s essential to focus on managing credit card debt. According to a report from StatCan, Canadians aged 35 and younger carry an average of $2,000 for credit cards and instalment payments and $12,500 for student loans. Their total debt average is $19,000, which includes other bills and obligations, such as car loans and lines of credit.
It’s best to focus on clearing debt (credit cards, student loans etc.) before putting money toward long-term investing in a registered retirement savings plan (RRSP) or tax-free savings account (TFSA). Retirement plans can wait. “Don’t worry about putting money into your TFSA or RRSPs at this point because we need to zero in and focus on one thing,” Lichtman explains. “If you have three credit cards and want to pay off all three simultaneously, it’s unrealistic. Pay off one first and then get to the other two.”
3. Build a sinking fund
Now for the good part: how to save money fast for a fun life. If you’re like most people, you’ll have to reverse how you currently afford entertainment. Lichtman says the key is calculating and separating your fun fund upfront.
Regardless of income, having a clear plan for both fixed and discretionary expenses is key. For example, suppose a household has $6,000 in income and $4,000 in fixed costs. In that case, Lichtman helps them allocate the remaining $2,000 for discretionary spending at the beginning of the month—covering spending on groceries, dining out, food delivery, coffee and entertainment. This proactive approach allows for better financial management.
Choose a high-interest savings account (HISA) for your sinking fund. That way, you can earn interest on your savings (and interest on the interest—that’s called compound interest. Check out MoneySense’s compound interest calculator). It’s also a good option for your emergency fund. Just keep the accounts separate.
Money-saving tips
So, let’s take the above scenario and assume you have $2,000 for discretionary spending and remove non-negotiables like groceries. If you typically spend $1,000 monthly on groceries (the average monthly spend on groceries in Canada was $1,357.37 in 2023), you have $1,000 left for eating out, personal expenses and leisure experiences.
