The first steps to being money-wise
It’s commencement season. All across the country through June, university and college students finally get their robes, mortarboards, and rolled-up diplomas. And then there’s the big question: Now what? It’s an exciting time. For many, it may be the first real taste of independence. Finding a job. A place to live. Paying off those student loans. It can start to sound a little overwhelming. But there are a few financial planning tips that can make the transition away from student life a bit less of a shock.
What you need to do now
Financially, you have to take stock. You have to make a list of what you earn and what you spend, what you own and what you owe. It’s not really rocket science, but it seems almost an impossible task for some folks, and it’s typically something most students have never really thought about seriously. If you don’t do this, however, you’ll never get yourself on a sound financial footing. Once you have a good, realistic picture of where you are now, you can start taking steps to get where you want to go.
For graduates, the single most important short-term financial objective is to pay down any existing student debt as fast as possible. Debt is insidious, and even though it might be a student loan, it is still a financial obligation, and it still racks up compound interest (that’s interest on interest), which you must pay. Not making loan payments or hoping for some sort of reprieve through a miraculous “debt forgiveness” program is a sucker’s bet. Dodging a debt repayment, even for a student loan, will affect your credit rating, possibly impairing your ability to get a loan for a car or a mortgage for a home several years down the road. So just don’t go there!
Start financial planning
I know. This is just about the last thing graduates have in mind. But spare at least a little while to think about your future. The key is to know where you want to end up. I know this sounds like putting the cart before the horse, but in order to create a long-term plan that will provide a real benefit to you, you need to make some decisions about your future. Make a bucket list of all the goals you want to achieve in your life and when. Make them achievable goals. “I will buy a house by 35,” “I will have two children,” “I will be debt-free by 50” and so on. Yes, it might be blue-skying a bit, but it helps you start focusing on financial goals.
Once you have the goals set out, you will need to attach a cost to each goal and then work backwards to determine how much you will need to save to meet each of them. Once you know how much you will need, it’s time to evaluate your income now and in the future to ensure that you are making and saving enough to support your goals.
Save and focus on tax efficiency
Start saving now! Target a certain amount to put aside every month as savings. Some advisers say you should save 10% of your gross income. At your age, that’s probably wildly unrealistic. So save whatever you can, even if it’s only a few bucks a week. You’ll be surprised at how quickly it adds up. Especially if you invest the money in a tax-efficient way.
That means you should open up a Tax-Free Savings Account (TFSA), and invest the money in some good-quality mutual funds, many of which typically let you make an initial investment for as little as $500 or even less. Your money grows inside the TFSA tax-free, and you can withdraw your funds tax-free. TFSAs are great for shorter-term savings goals. There are various rules about contributions and withdrawals, and a financial planner can explain all these to you.
Another option might be a Registered Retirement Savings Plan (RRSP), which lets you contribute a certain percentage of your earned income every year, in return for which you get a tax deduction. Funds grow in the plan on a tax-deferred basis, and are not subject to tax until you make a withdrawal. RRSPs are generally for longer-term retirement planning, and are useful once you get into higher income brackets (and you will).
Achieve great things
You’re at exactly the right stage in your life to create a financial plan for a disciplined approach to saving and investing. Stick to it, and you can achieve great things, and probably a lot sooner than you expect. If it all sounds a bit daunting, a qualified financial planner can help you set priorities, assign costs, and create and implement a plan.