TOP 5 FINANCIAL TIPS FOR YOUNG PROFESSIONALS
Managing your money isn’t always taught in schools but it can have a huge impact on your life and financial wellbeing. According to a study done by the Canadian Securities Administrators, the vast majority (67%) of young Canadians (18-24 years old) fall into the low knowledge category when it comes to financial literacy. In this article, we’re going to try to improve that percentage through a few helpful tips.
For recent graduates just entering the workforce, we know it can sometimes feel overwhelming. There’s a lot to digest, life events to plan for and challenges to overcome. That’s where we come in – we’re here to help you navigate financial best practices so you can achieve your future goals, whatever they might be. Here are our top 6 financial strategies for young adults:
1. ELIMINATE YOUR (STUDENT) DEBT
If you’re carrying debt, you aren’t alone. In fact, according to the Government of Canada, nearly three quarters of Canadians (73.2%) have some type of outstanding debt. For most older Canadians, the major form of debt is their mortgage. While for young adults just entering the workforce, it’s often student loans.
A good place to start is to avoid taking on new debt until you’ve eliminated the debt you’re already paying off. Yes, we understand that this is easier said than done, however your best bet is to make a plan to pay those debts down first. For example, you could dedicate a percentage of each pay cheque towards your debts each month. By chipping away at it, your student debt will be gone before you know it.
Debt isn’t a bad word, but it does have cost. The key is to avoid high-interest debt, like credit cards, and transfer those balances to a credit vehicle with a lower rate. If you have multiple sources of debt, perhaps consolidating your debt may be a good option. A Northern Credit Union Financial Advisor can help guide you in the right direction.
2. BE PREPARED FOR WHATEVER COMES YOUR WAY
An emergency fund is one of the most important and first things you should focus on when you’re just starting out. You never know when you’ll hit one of life’s little speed bumps and an emergency fund can really help cushion the impact.
Essentially, an emergency fund is there for the surprises that you didn’t have time to budget for, like the loss of a job, urgent repairs or unforeseen medical expenses. Ideally, you want to stash away enough to cover all your expenses for a minimum of three months and up to six months.
You want your money to be accessible anytime you need it, so a High-Interest Savings Account is a good place to keep it. A Tax-Free Savings Account (TFSA) is another good option because the money there is considered post-income-tax dollars (unlike your RRSP), so there’s no penalty to taking it out. Just make sure your TFSA investments are easy to redeem and withdraw.
According to the Government of Canada two thirds of Canadians (64%) have an emergency fund sufficient to cover 3 months’ worth of expenses, so most of us are on the right track.
3. START SAVING FOR RETIREMENT, LIKE YESTERDAY!
When you’re young and just at the beginning of your career, it can be hard to even think about retirement. It just seems so far away. But starting early can really give you an unbelievable boost to your savings because of two words: compound interest.
Compound interest is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest. The sooner you start, the more you’ll benefit from the power of compound interest.
Your first step should be to open a Registered Retirement Savings Account (RRSP), which is a government approved, tax-advantaged investing account. Essentially, any pre-tax money you put into the account will remain tax-free until you withdraw it, presumably at a lower tax rate when you’re retired. When you’re earning a full-time salary, you can use as many tax breaks as you can get.
After saved up your emergency fund, it’s a good practice to put roughly 10% of your earnings towards your RRSP. However, there are limits to how much you can contribute each year, shown on your previous year’s tax return.
It’s also important to know how much you’ll need to save for retirement so you can work towards it. According to the Government of Canada, over half of Canadians (53%) say they don’t know how much they need to save to maintain their standard of living in retirement. Yikes!
4. KEEP A GOOD CREDIT SCORE
Your credit score is a rating based on your credit history that gives lenders an idea of your ‘credit worthiness’. Most credit scores fall between 600 and 750. Scores between 700-800 are often considered good and 800+ scores are generally considered excellent.
Eventually, you’re likely going to want to buy a house. This is an example of when your credit score will come into play. While not the only factor, a good credit score could help you qualify for a better interest rate because you’re less of a risk for the lender. And, as a result, you’ll save more on your mortgage over the long term.
Your credit score is calculated based on many factors, including but not limited to your payment history, debts, length of credit history and types of credit in use. Too keep a good credit score, the best thing you can do is keep your debt under control and pay your bills on time. A good tip for this is to set up automatic payments, so you don’t miss any by mistake.
5. LIVE WITHIN (OR BELOW) YOUR MEANS
For many young Canadians, creating and maintaining a budget is one of the most important first steps you can take towards managing your money effectively. The challenge is to find time for it and do it one step at a time, so you don’t feel overwhelmed.
We suggest starting by tracking your monthly expenses and organizing them by category. There are many budgeting apps that can help you do this. In fact, the most common method of budgeting is using a digital tool (20%), followed by using a traditional approach, such as writing the budget out by hand (14%).
Once you know what you’re spending on, you can identify areas you may be able to cut back, as well as how much disposable income you can allocate toward paying down your debts, saving for larger ‘big ticket’ expenses down the road and retirement.
According to the Government of Canada, people who budget are almost 50% less likely to overspend, 11% less likely need to borrow, and approximately 10% more likely to pay down their mortgage and debts faster.
Entering the workforce is an exciting time in your life. You’re earning money for the first time. But there are also challenges that you’ll have to deal with in order to meet your long-term financial goals. We can help you put together a plan. If you have questions or want some friendly advice, we can be reached at the True North Hub at 1-866-413-7071.