A great read here for you. Finances, savings and investments for the future seems to be the furthest things from our young peoples minds after graduation. Its a great opportunity to start education our younger generation before they graduate and introduce them to simple and small steps on how to apply and build their credit, saving for their future and what it takes to apply and be approved for a mortgage later down the road when they need one.
Personally I would love to see a mandatory life skills/financing course be offered earlier on in life, like high school, to teach and prepare our younger generation on these important topics. Its sets them up for success later on in life and teaches them the importance of managing credit early on. Its also a good time for us as parents to take the lead role and have a conversation and teach our kids the importance of managing money and credit responsibly. I’m guessing that alot of us simply leave it for them to figure out on their own. Here is a great place to start, simply click on the link below, here you will find numerous topics of interest to help guide you about, the best bank accounts that are free, the lowest rate credit cards, mortgage calculators and the list goes on. Of course if you have any questions about financing or credit, please feel free to contact me directly.
University graduation is a significant milestone. Being a student means a few things; studying hard, spending frugally, developing friendships, sleepless nights, and dreaming of what’s next.
It only seems right that graduation be the end culmination of some of these habits. With year-round employment income, no longer does one have to pass over the weekend Vegas trip, the spring break in Mexico or the purchase of a new car. Right?
As a financial advisor, I am fortunate to meet a significant portion of the population who have recently completed their studies, they’ve landed their first job and they’re eager to continue learning, with a newfound emphasis on personal finances. In our industry, for the benefit of the individual, it is common to place individuals amongst various stages in the financial life cycle. Placement in these stages is broad, but adequate, and helps bring clarity to preparation for tomorrow and beyond. For ease purposes, let us consider a recent graduate, an occupant of the “young adult” life stage. Young adults are currently employed and have little monthly expense obligations. What is most important for young adults is considering the near future, for most, marriage, home purchase and children are on the horizon. These are three distinct life events that all come with significant financial consequences, this next stage entails some of the largest expenses one is likely to incur in their entire life; the importance of preparation is obvious.
Young adults have a window of opportunity for great savings, though it is mainly true that these are their lowest income-earning years, expenditure obligations are also at their lowest. All too often individuals ignore this opportunity, lured instead by the vast availability of credit, nights on the town, vacations and all the newest consumer goods.
It’s easy to lack budgetary awareness when excess funds are only a credit limit increase away. In no time at all balances accumulate and instead of heading into the next life cycle stage fully prepared, they often go into it well-behind, strung down by these outstanding balances and sometimes even a poor credit score. Down the road in this instance, seeking a mortgage approval to house a young family becomes a fierce obstacle, not to mention the difficulty in saving for a down payment. Why not go into that stage armed and ready. Having significant savings and a clean slate of credit can mean a quick approval, possibly a larger down payment, significantly decreasing the interest one pays, unlocking even more savings.
This solid financial foundation may also put one in the position to bargain for a much lower mortgage rate, again more saving. In regards to mortgages, interest rate, amortization and down payment all greatly affect total payback amount (the amount that actually comes out of your pocket in the end).
Getting the ball started on savings is critical, but how one saves is also important. Young adults are extremely lucky to have the TFSA at their disposal. It is a plan geared to help individuals save faster, by not paying taxes on any and all accumulated gains (interest or capital), one can keep more money in their pocket. What makes this demographic so lucky is they have time on their side, a 22 year old graduate today has the potential benefit of 40 years worth of tax-free savings between now and age 62 (a very general assumption for an age of retirement), the plan does not break down either, the funds can be kept TFSA sheltered for even longer if desired. An individual in their 40’s does not have the benefit of this extensive time frame. The TFSA does not have to be retirement oriented, withdrawals are not limited (though re-contributions are over-contributions face penalty fees) so if the time comes to make a significant purchase, funds in your TFSA can be made available.
An individual contributing $400 monthly for five years into a no-interest savings account would accumulate $24,000. That same $400 contribution put into a TFSA, earning a modest 4.5% annual average, would achieve an amount of $27,100. The importance of interest, and more specifically, the importance of tax-free interest, is seen in the extra $3,100.
$400 is a great starting amount. Firstly, it sets up well in regards to TFSA contribution restrictions, the $4,800 annually that you contribute falls within the current $5,000 maximum. Further savings can be kept in non-registered accounts or deposited to an RRSP (for further tax advantage). TFSA contribution maximums have the potential to increase in the coming years, so an increase to the $400 may soon be of option as well. Secondly, it’s an amount that, added with a young adults current monthly rent amount, is lower than what ones monthly shelter cost would be on a mortgage. It is important to consider mortgage payment (principal, interest and insurances), utilities, property taxes, condo fees, etc. when calculating shelter costs. This could be considered experience gained towards the budgetary constraints that will someday come along with future mortgage costs.
Doing the things that you were forced away from during school is still important. Strike a balance between spoiling yourself and saving. It is best that the balance be savings heavy, spoiling yourself should never come at the expense of one’s credit or savings.
I know it’s difficult, I’m living it, I graduated one year ago this month. I wasted hours of study time daydreaming of my future lifestyle, fast cars, Vegas villas, and a lot of golf. I overlooked many of the costs that were to come.
Reality sure can hit a person, but I’ll choose being hit now while I can handle it, as opposed to ten years from now when it’s possible my wife and children also have to take the brunt.
Kyle Baranyk is a Financial Advisor at Servus Credit Union Ltd. in Calgary