New grads from university and college may have landed a good job, but often find themselves with a pretty hefty student loan debt load. Some are faced with the prospect of years of loan repayments. Others wonder whether they should just ignore it and hope the government implements a debt forgiveness program. In fact, most need a quick lesson in money management.
These days, many grads across the country face some daunting challenges: Finding a job; 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 do freshly graduated students do first?
First, it’s important to take stock financially. You have to 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 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 compound interest can make the debt load even worse. It’s critical to develop a debt-repayment plan – and stick to it! Pay down principal whenever possible. Skipping payments or hoping for some sort of “debt forgiveness” program is a sucker’s bet. Sitting governments have a way of promising the moon before elections in an effort to “buy” votes – especially if they’re desperate – and then promptly reneging on the promises once re-elected. 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!
Why start financial planning now?
Although this is just about the last thing graduates have in mind, it’s important to spare at least a few minutes to think about your future. 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. Attach a rough cost to each goal and then work backwards to determine how much you will need to save to meet each of them.
Save and focus on tax efficiency
Start saving now! Target a certain amount to put aside every month as savings over and above debt repayments. Some advisers say you should save 10% of your gross income. With most grads in their early 20s, 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.
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. 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).
You can find more information on credit and debt management at the Financial Consumer Agency of Canada’s Financial Literacy Database.
Young grads are exactly at the right stage in life to create a financial plan for a disciplined approach to savings and investing. Stick to it, and you can achieve great things, and probably a lot sooner than you expect.
Courtesy Fundata Canada Inc. © 2017. Robyn Thompson, CFP, CIM, FCSI, is president of Castlemark Wealth Management. This article is not intended as personalized advice. Securities mentioned are not guaranteed and carry risk of loss. No promise of performance is made or implied.