What to do when school’s out for good

New grads: You’re in charge now!

After the ceremonies and speeches and mortarboard tossing, fresh new grads from colleges and universities have to leave their structured and sheltered life and start fending for themselves in the real world, many perhaps for the first time. It can be a slightly scary prospect, especially if you have to make your own way financially. But if you start with a few foundational personal financial principles, that path can be a lot smoother.

1. Pay down debt

First, take a snapshot of your financial situation – what you earn and what you spend, what you own and what you owe. Once you have a realistic picture of where you are now, you can start taking steps to get where you want to go.

Employment, of course, should be your top priority. Though the temptation is great, you can’t rely on parents to keep supporting you for long after you graduate. With cash flow coming in from steady employment, it’s vital to start paying down any existing student debt as fast as possible.

Debt is insidious, and compound interest can make the debt load even worse. Develop a debt-repayment plan – and stick to it! Pay down principal whenever possible. Skipping payments or hoping for some sort of government “debt forgiveness” program is a sucker’s bet. And 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. If you have difficulty meeting loan repayments in the short term, be sure to contact the loan officer at your school. They may be able to adjust loan repayment terms. But do not simply ignore those payments!

2. Save more, spend less

With full-time employment, possibly with a good salary, many new grads feel the lure of financial freedom, spending grandly on new cars, bars, clubs, dining out, travel, and entertainment. With easily available credit cards offered to new grads by most financial institutions, that can quickly put you right back into the debt crunch – but much worse than student debt, because the interest rates are stratospheric. Before you know it, you’ll be using all your cash flow to pay down credit card debt. Don’t become a slave to debt – avoid this trap!

Enjoy yourself, but do it within your means. With disposable income left over, target a certain amount to put aside every month as savings over and above debt repayments. Start building appreciating assets. 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.

3. Plan for the future

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. Be diligent about setting aside funds to achieve those goals. One of the best ways is to start an automatic savings plan, so that a set amount goes directly from your paycheque to your savings or investment account each month.

Consider a term life insurance policy. For healthy young people, the cost of premiums is very low, and a term life policy offers pure protection (it’s not an “investment”), taking any financial stress off of your survivors. This becomes a critical element of financial planning for couples who decide to start a family.

Young grads are exactly at the right stage in life to create a financial plan for a disciplined approach to saving, investing, and money management. Stick to it, and you can achieve great things, and probably a lot sooner than you expect.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.