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For many new grads this year, leaving the security of the academic envirnoment for the big wide world can be a slightly scary prospect, especially if you have to make your own way financially and can no longer rely fully on the Bank of Mom and Dad. But if you start with a few foundational personal financial principles, that path can be a lot smoother.
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. 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!
With full-time employment, possibly with a good salary, many new grads feel the temptation to spend more, mostly on credit. But don’t become a slave to debt – avoid this trap! Enjoy yourself, as the post-Covid economy opens up, but do it within your means.
In addition, pay down any high interest debt (like credit cards) as soon as possible. Your objective should be a zero monthly balance on your credit cards. There’s no point trying to generate an annual investment return of 7% to 9% if your credit card interest is 25%.
And start building appreciating assets. 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.
Probably the best, most tax-efficient investment vehicle that a new grad can start up is a Tax-Free Savings Account (TFSA). Use it to invest in some high-quality mutual funds or exchange-traded funds (ETFs). You don’t need a fortune to start with, as many mutual funds typically let you make an initial investment for as little as $500 or less. ETFs trade on stock exchanges, so your minimum investment may have to be considerably more, and you’ll also pay brokerage fees to trade.
In any case, your money grows inside the TFSA tax-free, and you can withdraw your funds tax-free. TFSAs are great for shorter-term savings goals.
If you haven’t opened a TFSA, and you’re eligible to do so now, the annual contribution limit for is $6,000 for 2021. That means total contribution room available since the introduction of the plan in 2009 is now $75,500 for someone who has never contributed to a TFSA. Most grads won’t be able to do this (unless they have some exceptionally generous relatives!). While there is an annual maximum limit, there is no minimum. So start by contributing what you can.
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. This becomes more important when you have full-time employment, regular income, and tax saving strategies become more important. Funds grow in the RRSP 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).
To help make sense of the financial world, which may be a new experience for many grads, speak to a qualified financial planner. If your parents have a good long-term relationship with a professional advisor, chances are they’d be happy to give you some advice as a new grad as well. Otherwise, check with your bank – most have qualified planners on staff.
You can find more information on personal finance, credit and debt management at the Financial Consumer Agency of Canada’s Financial Literacy Database.
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
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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.
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