One of the most common money questions: should you save more or start investing? The answer depends on where you are in your financial journey. Here's a clear framework to help you decide.

The Financial Priority Order

Think of your finances like building a house. You need a solid foundation before adding floors. Here's the recommended order:

1. Starter Emergency Fund ($1,000-$2,000)

Before anything else, save a small emergency buffer. This prevents you from going into debt when unexpected expenses hit.

Why this comes first:

Car repairs, medical bills, and appliance failures don't wait
Without savings, every emergency becomes new debt
Even $1,000 covers most common unexpected expenses

2. Employer RRSP/Pension Match

If your employer matches retirement contributions, contribute enough to get the full match. This is literally free money.

Example:

Employer matches 50% up to 6% of salary
On a $60,000 salary, contribute $3,600/year
Get $1,800 free from your employer
That's an instant 50% return!

Don't leave this on the table. Even if you have debt, the guaranteed return from matching beats most interest rates.

3. High-Interest Debt Payoff

Pay off debt with interest rates above 7-8%. This typically includes:

Credit cards (15-25% interest)
Payday loans (avoid these entirely)
Personal loans (10-15% interest)
Store financing (often 20%+)

Why this beats investing: Paying off a 20% interest credit card is equivalent to earning a guaranteed 20% return on your money. No investment offers that with zero risk.

Debt payoff order (Avalanche Method):

List debts by interest rate (highest first)
Pay minimums on all
Throw extra money at the highest rate
Repeat until debt-free

4. Full Emergency Fund (3-6 Months)

Now build your emergency fund to cover 3-6 months of expenses. This protects you from job loss, major medical issues, or extended emergencies.

How much you need depends on:

Job stability (stable job = 3 months, variable income = 6 months)
Number of income earners in household
Monthly expenses
Dependents

Where to keep it:

High-interest savings account (HISA)
Money market fund
Not in investments (too risky for emergency money)

5. Tax-Advantaged Retirement Accounts

Now you're ready to invest seriously. Max out tax-advantaged accounts in this order:

For Canadians:

TFSA (Tax-Free Savings Account)

Contributions aren't tax-deductible
Growth and withdrawals are 100% tax-free
2024 limit: $7,000/year (plus unused room)
More flexible than RRSP for withdrawals

RRSP (Registered Retirement Savings Plan)

Contributions are tax-deductible
Taxes paid on withdrawal in retirement
Best if you're in a higher tax bracket now than you'll be in retirement
2024 limit: 18% of income up to $31,560

Priority: Most people should prioritize TFSA first, unless they're in a high tax bracket or their employer doesn't match RRSP contributions.

6. Additional Investing

Once you've maxed tax-advantaged accounts, you can invest in:

Non-registered investment accounts
Real estate
Other investment vehicles

Special Situations

You Have Student Loans

Federal student loans typically have reasonable interest rates (5-7%). You can balance debt payoff with investing:

Pay minimums on student loans
Max employer match
Split extra money between loans and TFSA

You're Saving for a House

Use the FHSA (First Home Savings Account) for house savings:

$8,000/year contribution limit
Tax-deductible like RRSP
Tax-free withdrawal like TFSA
Best of both worlds for first-time buyers

See our complete guide to saving for a house for more details.

You Have Low-Interest Debt

Debt under 5% (like some mortgages or car loans) can be kept while investing:

Historical stock market returns average 7-10%
Low-interest debt costs less than potential investment gains
Pay minimums and invest the difference

However, if debt causes you stress, paying it off for peace of mind is valid too.

How Much Should You Save vs. Invest?

The General Rule

Save: 20% of take-home pay (minimum)
Of that 20%:
- Emergency fund until full
- Then debt payoff
- Then retirement accounts
- Then taxable investments

Sample Allocation

For someone earning $5,000/month after taxes:

| Stage | Monthly Allocation | |-------|-------------------| | Building emergency fund | $1,000 to savings | | Paying high-interest debt | $1,000 to debt payoff | | Investing for retirement | $1,000 to TFSA/RRSP |

Adjust based on your situation, but 20% total is a solid target.

Common Mistakes to Avoid

1. Investing Before Emergency Fund

The stock market drops, you need emergency cash, you sell at a loss. This is the worst outcome.

2. Skipping Employer Match

You're literally refusing free money. Always contribute enough to get the full match.

3. Keeping Too Much Cash

Once your emergency fund is full, excess cash loses value to inflation. Put it to work investing.

4. Investing with High-Interest Debt

Paying 20% interest while earning 7% investment returns is losing 13% annually.

5. Analysis Paralysis

Waiting for the "perfect" time to start investing. Time in the market beats timing the market.

Getting Started Today

Here's your action plan:

Check your current situation:
- Do you have $1,000+ emergency fund?
- Are you getting your employer match?
- What's your highest interest rate debt?
Identify your current step:
- Use the priority order above
- Focus on one step at a time
Automate your contributions:
- Set up automatic transfers on payday
- Remove the temptation to skip
Review quarterly:
- Adjust as your situation changes
- Celebrate progress along the way

The Bottom Line

The save vs. invest question isn't either/or—it's a sequence. Build your foundation first (emergency fund, debt payoff), then build wealth (tax-advantaged accounts, investments).

Start where you are, use what you have, do what you can. The best time to start was yesterday. The second-best time is today.

Should You Save or Invest First? A Priority Guide for Your Money