Welcome to my Milestone Money series. All the month of April I’ll be talking about the financial concerns of each generation, starting with young adults, all the way through Baby Boomers. Read, share, and consider your financial future.
You’re young and maybe thinking too far into the future isn’t appealing. There are many unknowns as you embark on this next stage of your life, but if you’re between the ages of 18 and 24 there are some financial basics that you should be taking the time to think about, and if appropriate, take some action on. It doesn’t mean you have to be thrust into a complex financial planning process, or devote all your time and money to saving for the future. You can still enjoy your life and have fun, but taking a small amount of time when you’re young to set good habits and develop a deeper understanding of what’s to come will on set you up for future success.
Here’s a suggestion of what you should be considering:
1) Develop good habits and an understanding of money basics
This includes a grasp on knowing where your money is going; developing and following a budget, and; understanding financial basics. Knowing fun facts like how cell phone providers report to the credit bureaus, which if you’re not on top of paying your bill on time can tank your credit score and leave you unable to access future credit needs is helpful to make informed decisions. Develop effective money habits such as putting a percentage of each paycheque, whether you’re working part- or full-time, away into savings, and living below your means (i.e. always spending less than you earn).
Know Where Your Money Is Going: I also refer to this as “conscious spending”. It can be challenging to keep track of what is available in our bank account when so many automatic withdrawals and spending so easily takes place. It’s imperative to know so no expenses are returned NSF and you’re charged a fee. This includes any free trials or subscriptions, surprise fees and increases, and just taking a diligent look at your expenses. Looking closely at your car insurance policy to make sure you understand what you’re paying for. This is the same for your communications such as your cell phone and cable/internet providers. If you can reduce any expenses, do so.
2) Know what savings and investment options are available to you
Once you reach the age of 18, it’s not like information just automatically gets absorbed because you’re an adult and can open your own investment contract. It’s up to you to learn what is available, and more importantly, what is the best option for you and your unique needs. Your parents didn’t have the same options available to them at your age so their advice or what they did may have been right for them given their situation at the time, but not the best fit for you today. This is especially relevant when it comes to saving and investing. With the introduction in 2009 of the Tax-Free Savings Account, investors now have a more flexible tax shelter option, but with restrictions and parameters you need to understand. There are also more online investing platforms, resources, and alternative investments such as cryptocurrency that are trendy and available to design and grow your own portfolio if that’s where your interest lies. Just because you’re now employed full-time doesn’t mean that “saving for the future” has to be in an RRSP account. In fact, it likely isn’t the best option, especially if you have specific financial goals in mind.
References:
A mind-blowing look at RRSP vs TFSA
Master Your Money: Investing 101
3) Be disciplined and spend based on your income
This is where we can get into understanding your relationship with money and what motivates you. Do you want immediate gratification so you use debt and struggle to pay it off over time? Do you prefer to save up for something and pay cash? You’re young and may feel pressure from those you see around you to have certain things or be a certain person, that isn’t within your financial capabilities. It’s important to practice discipline and prioritize financial foundations that will lead you to success and future comfort.
The most powerful financial tools for success are time and consistency. Using your existing habit of saving a percentage of your income each paycheque, and investing that each month towards your future financial goals will not only allow compound interest and dollar-cost averaging to do their thing, but those habits will touch so many other areas of your life and allow you to enjoy a lifestyle appropriate to your means without financial stress.
TOP TIPS:
- Live below your means when your needs are minimal so you’re not digging yourself out of debt when larger financial goals want to be achieved
- Don’t loan money you can’t afford to lose
- Don’t co-sign for a friend or family member because it may put you in hot water if they’re not able to pay
- Research products online and shop for value: sometimes spending a little more for better quality today will save you money in the long-term
- Become a smart shopper: use coupons, negotiate prices, and plan meal plans ahead of time so you’re buying what you need.
- Ask for separate bills: it may be tempting when out with friends to “split the bill” or even treat, but never feel obligated to do so. Make it clear with your friends and your server that you’d like your bill to be separate, so you’re only paying for yourself.
- Don’t “worry about it later”: putting things off, avoiding bills can have dire consequences
4) Understand debt and all that goes with it
Understanding good and bad debt and how it can positively and negatively affect your overall financial picture will help you to make decisions. By this age you’re likely aware of and may even have some debt, but understanding the effect of interest rates, where payments are allocated, and how to most effectively eliminate debt is that next step. Pay attention to the credit cards you DO acquire, their annual fees and interest rates, and try to stick to just one. You can cancel a credit card at any time, or reduce the available limit to something more manageable for you. Whenever possible, try to have a card that offers cashback or other rewards so that you’re offsetting some of your fees and interest with additional benefits, and avoid in-store credit cards even if it will save you at the check-out as they often have the highest interest rates.
TIP: Keep your credit use under 30%, meaning that if you have a credit card with a maximum limit of $1000, you never carry more than $300. Ideally, you’re paying it off in full each month.
5) Set goals, have plans
Whether it’s to fund your annual vacation with friends through savings and cash, or amass a first-home deposit, setting financial goals and having direction will provide you motivation to practice good money habits and give you something exciting to work towards.
Everyone’s goals are different but working with a professional can help you to recognize what’s needed to achieve those goals, including sacrifices or other needs. Remember, if you’re finding that you don’t have the means to live and achieve your goals, your only options available are to earn more, or spend less. Diversifying your income streams can not only bring you closer to your financial goals, but can provide you with ongoing income security. So if you’ve been thinking about a side hustle and haven’t kicked it into action yet, maybe now’s the time. If you ARE ever considering moving jobs, however, be sure to make a plan and have the next step lined up so you’re not needlessly putting your financial security at risk.
Having goals to work towards can also make your money management fun. Using one of the many apps available to track your spending and goals, and having small rewards for yourself when you’ve achieved a milestone can make it more desirable and keep you accountable.
Equating cost to real-life purchases can also help you better understand the value of something. For example, purchasing life insurance isn’t likely something you’d prioritize when you’re in your 20s, but if life insurance at the age of 22 only costs 3 Starbucks coffees a month, is that really such a sacrifice to put into place a financial foundation?
While it can be intimidating to think about talking to a financial advisor, young adults shouldn’t be afraid to take control of their financial futures early. As an advisor, I hear quite often from people in their 40’s that they wish they’d started working with a financial professional sooner.