Q.1. What should I do with this extra money?

There are few wise things that you could do. You should consider paying off any debts that you have. In doing so, pay off the debt with the highest carrying charges first. In addition, you could consider setting money aside for your children’s education if this is appropriate to your situation or you could consider investing some of this money for future needs such as retirement. Do not forget, within limits, to reward yourself for this accomplishment.

Q.2. Should I pay down debts or save for a “rainy day”?

Striking a balance between the two is a good approach. In this way you are reducing your debt load but you are also saving for emergency situations that could arise. By reducing your debt load you also reduce the cost of that debt and that will, in turn, generate more money. Money that is saved also works for you as it earns interest.

Q.3. How does compound interest affect my savings over time?

Each year you make money not only on the principal amount but also on any interest that was earned over the savings period. If you save $1,000 and are getting 3% interest after year you will have $1,030. At the end of the second year you will have that $1,030 and 3% interest on that amount so you are actually earning interest on the interest. The Rule of 72 will tell you how long it will take to double your money.

Q.4. What is the best way to save some of this extra money?

There is the concept of paying yourself first that will help. In other words, arrange for some of this extra money to be saved before you do anything else. One way to do this is to arrange for a certain amount of your pay to be automatically deposited in a high interest savings account which cannot be accessed through use of your debit card.

Q.5. What else could I do make this extra money work for me?

You could put some of this money into a Registered Retirement Savings Plan to generate a refund for you and then use that refund to reward yourself. This allows you to save for the future and still enjoy some of the benefits of that raise.

Q.6. What tax bracket am I in?

Congratulations, you’ve received a raise! This may or may not have an effect on your tax bracket. Tax brackets are a range of incomes taxes at a given rate. Your tax bracket depends on your yearly salary.

Q.7. What are the kinds of tax?

Income tax is levied directly from the government of Canada that is taken directly from your income. Sales tax is the tax levied from the sale of goods or on the receipts from sales. And finally property tax is a tax based on the value of your property, which is levied by the jurisdiction where the property is located.