The first step in the financial journey is important.
Getting off on the right foot greatly improves the chances of reaching financial goals, be they a comfortable retirement, an ample college fund for the children, or financial independence at an early age.
“If I had looked into the fundamentals [of personal finances]30 years ago … your mother and I would be very well off today,” says David’s 58-year-old father in David Chilton’s book, The Wealthy Barber .
Perhaps the 10 financial pointers below will be of some assistance in helping teenagers and post-secondary students get started on a path that leaves no regrets.
1. In the teens and early 20s, investing in oneself takes precedence. Education, training and work experience build up a person’s “human capital” and lead to a higher stream of income over their life span. “Your job and future career is the most important factor in achieving financial independence and security,” notes Ken Hawkins, vice-president of research at Toronto-based financial advisory firm Weigh House Investor Service (www.weighhouse.com). Adds Jean Lesperance of the Canadian Financial DIY blog ( http://canadianfinancialdiy.blogspot.com): “One of my best financial moves was getting a degree in business that has … helped me get better jobs and earn more over my career.”
2. Borrowing for post-secondary education, training programs, or starting a business is the good kind of debt, for reasons mentioned above. But it can go awry. For writer Craig Baird of Stony Plain, Alta., who wrote The Complete Guide to Investing in Index Funds ), it was one of his worse financial mistakes: “I got a degree … which saddled me with a $40,000 debt I only have now paid off. What made it worse was I never really got a job from that degree, and am in a totally different industry now.” In short, it pays to be frugal and borrow less. Consult guides to economical living such as The Debt Free Graduate book (www.debtfreegrad.com). While in school, “pursue scholarships and bursaries,” recommends Adrian Mastracci, a fee-only portfolio manager at KCM Wealth Management Inc. (www.kcmwealth.com) in Vancouver.
3. How much debt should a student assume? Tim Cestnick, a chartered accountant and author of Winning the Education Savings Game , recommends the Rule of 10s: a graduate needs to land a job paying $10,000 more than their total student loan in order to pay off it off within 10 years (works out to a monthly payment close to 10 per cent of income). Any bigger, and it could be too much of a strain when the time comes for mortgage, kids and other financial commitments. It might also mean a less comfy retirement: $3,000 put into a TFSA at the age of 22 would grow to $95,000 by retirement compared to $44,000 if done 10 years later (assuming an 8-per-cent return, as historically earned by stocks).
4. Many teens with part-time jobs have plenty of disposable income. Lacking financial obligations, it’s easy for them to fall into habit of spending freely on trendy jeans, brand-name shirts, cellphones, and other things. Yet saving is critical to reaching financial goals, so the earlier one gets into the habit, the better. When Preet Banerjee, an Oakville, Ont.-based financial adviser, flipped burgers at McDonald’s as a teenager, his father started him on a pre-authorized contribution plan with a mutual fund. “I put in $50 every two weeks, if I remember correctly,” says Mr. Banerjee, who blogs at WhereDoesAllMyMoneyGo.com (www.wheredoesallmymoneygo.com).
5. Canada’s tax system is horribly complex and many people miss opportunities to preserve or augment their finances because they are not familiar with all the details. Don’t leave money sitting on the tax table: time invested in learning about registered plans, tax credits, and so on can yield major dividends. For example, an 18 year old who files a tax return and opens up a Tax Free Savings Account (TFSA) – even if there is no money to deposit – begins accumulating contribution room every year afterward. By the time they reach 25, they can put aside as much as $35,000 to compound tax free. Other reasons to file tax returns include claiming GST/HST credits and accumulating contribution room in registered retirement savings plans.