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Being a new grad is exhilarating, exciting, and slightly scary – especially if you have to make your own way financially. But starting off with some basic personal financial behaviour patterns can make the path a lot smoother.
Start with your current financial situation. It’s pretty simple. List what you earn and what you spend, what you own and what you owe. Be realistic. Don’t fudge or lie to yourself – that’s one bad financial habit you can’t afford to get into. Once you know where you are now, you can start setting objectives, making plans, and finding ways and means of achieving them.
Employment should be a top priority. You can’t rely on the Bank of Mom & Dad to keep supporting you for long after you graduate. And your top priorithy with cash flow coming in from steady employment is to pay down any existing student debt as fast as possible.
Debt is insidious, because compound interest keeps adding to the load. Make a debt-repayment plan – and stick to it! Pay down principal whenever possible. And never skip payments in the hope of some sort of government “debt forgiveness.” Skipping a payment and going into arrears 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 find yourself unable to make loan repayments in the short term, contact the loan officer at your school. They may be able to adjust loan repayment terms. But do not simply ignore those payments!
This is another important type of financial behaviour it pays to start early. 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. A financial planning rule of thumb is to save 10% of your gross income. For most grads, that’s 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.
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.
Another option to consider is 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).
One practical way to make steady contributions is through an employer-sponsored group RRSP, with contributions made through regular transfers from your paycheque. Some employers may also offer matching contributions.
Although this is just about the last thing most 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 wish list of all the goals you want to achieve 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.
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, financial mentor, and motivational speaker.
Notes and Disclaimer
Content copyright © 2023 by Robyn K. Thompson. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.
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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