Paying down debt, building savings, emergency benefits
This year has been particularly challenging for new graduates of post-secondary schools. Because of the COVID-19 lockdowns, the last semester for most students was likely done online, as were exams and other final submissions. Graduation ceremonies have been postponed. But at least marks and certificates could be mailed out. So congrats to all the new grads! But what’s next? As lockdowns lift and things slowly return to normal, you’ll still have to deal with some “real world” matters – and these are mostly financial.
First, it’s important to take stock financially. Make a list of what you earn and what you spend, what you own and what you owe. Once you have a good, realistic picture of where you are now, you can start taking steps towards your financial goals.
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.
In addition, pay down any high interest debt (like credit cards) as soon as possible. Your objective should be a zero balance on your credit cards. There’s no point trying to generate an annual investment return of 7% to 9% if your credit card interest is 25%.
Find that job, start paying off those student loans, and start then start a savings plan. Put it aside every month and be consistent! Contribute that money to a Tax-Free Savings Account, which you can open at any bank. You’ll be surprised at how quickly it starts to add up. Especially if you invest the money in a tax-efficient way.
The COVID-19 crisis has thrown many plans into disarray. If you find yourself financially strapped, government financial relief programs are available, and I discuss these below. If you’re fortunate enough to have a job already lined up, start thinking about setting up some savings plans to help you weather the inevitable financial storms.
Tax-Free Savings Account
Probably the best, most tax-efficient investment vehicle that a new grad can start up is a Tax-Free Savings Account (TFSA). Use it to invest in some high-quality mutual funds or exchange-traded funds (ETFs). You don’t need a fortune to start with, as many mutual funds typically let you make an initial investment for as little as $500 or less. ETFs trade on stock exchanges, so your minimum investment may have to be considerably more, and you’ll also pay brokerage fees to trade.
Keep in mind, though, that TFSA rules and regulations can get complicated. First, you can hold many different types of assets in a TFSA: cash; stocks listed on designated exchanges; mutual funds and ETFs; bonds; GICs; and certain shares of small business corporations. Shares traded “over-the-counter” on dealer networks or exchanges are not qualified TFSA investments.
Avoid using the TFSA as a sort of personal ATM. If you lose track of your contributions, withdrawals, and re-contributions within a year, you may find you’ve over-contributed, and you’ll be subject to some rather stiff penalties by the Canada Revenue Agency.
In the current economic environment, jobs are likely to be hard to come by. If you’re stuck for funds, consider applying for the Canada Emergency Student Benefit (CESB). It provides a payment of $1,250 for each four-week period from May to August 2020. You may be able to get an extra $750 for each four-week period if you have a disability or have at least one child under 12 or other dependants.
The CESB is available to both students and recent graduates who cannot find work or are unable to work because of COVID-19. You may also be eligible if you are currently working during the COVID-19 pandemic, but your income from employment and self-employment has been $1,000 or less (before taxes) during the four-week period you are applying for.
In the case of post-secondary grads, you must have completed or ended your post-secondary studies in December 2019 or later. High school grads must have completed or expect to complete high school, or receive, or expect to receive, high school equivalency in 2020, and have applied for a post-secondary educational program that starts before Feb. 1, 2021.
Get more information at the Government of Canada CESB website.
To help make sense of the financial world, which may be a new experience for many grads, speak to a qualified financial planner. If your parents have a good long-term relationship with a professional advisor, chances are they’d be happy to give you some advice as a new grad as well. Otherwise, check with your bank – most have qualified planners on staff.