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ReturnWith school finally in the rearview mirror and the first steps on the job market, the start of one’s “real” adult life is an ideal time to lay the foundations for a strong financial health.
In order to achieve this, here are 8 essential steps.
Debts
The income increase at the beginning of a career can be dangerously offset by an increase in debt and financing.
If credit card balances accumulate, repayment must become the top priority.
Tip: Always pay your minimum monthly payments on each debt. Any extra space in your repayment capacity should be put towards the debt with the highest interest rate.
The budget
Let’s face it: the real purpose of a budget is to know how much you can spend on fun stuff without feeling guilty about it.
The formula is simple:
Net Income – Savings – Predictable Expenses = Freedom!!!!
As much as possible, we should set 10% to 15% of our net income towards savings.
Tip 1: Don’t be too restrictive. Just like a diet, a budget that’s too strict may become discouraging and fall apart after a few months.
Tip 2: Analyze your spending history of the past 6 months in order to estimate how much you spend on certain variable expenses such as gas and social activities.
The Emergency Fund
A sufficient emergency fund must be big enough to pay for at least 3 months of foreseeable expenses. The most conservative advisors would recommend up to six months.
This includes fixed expenses such as rent and cellphone charges, but must also take into account variable expenses such as groceries.
Tip: An automatic transfer on your payday is the best way to discipline yourself without too much effort.
The TFSA
The Tax-Free Savings Account is generally the best tool to start building up savings.
To better understand how it works, read our article here.
The RRSP
Next comes the RRSP, which offers tax credits and can serve as a tool to accumulate the downpayment for a first home under the HBP (Home Buyers’ Plan).
It is usually around $35,000 in income that it becomes advantageous to contribute.
To learn more about the RRSP, consult our article here.
To learn more about the Home Buyers’ Plan, consult our article here.
The credit score
The credit report is a consuming and borrowing report card that follows us during our entire lives.
Broadly speaking, the elements that affect the rating and score are :
- Late payments
- Outstanding account balances (especially if they are at the collection agency stage)
- Too many requests for financing
- Debt load
A periodic audit ensures the accuracy of the information and provides a review of your financial situation. It also allows you to act promptly in the event of fraud and identity theft.
As long as everything is under control on your credit report… life is good! And don’t get too bummed out by youthful financial mishaps. A few years of good behavior will erase them completely (7 years maximum).
Tip: Subscribe to the free services offered by Equifax. This should give you access to most of the information you need.
Housing
Buying or renting?
Contrary to popular belief, the former is not necessarily better than the latter. You can rent and be financially responsible, just as you can be an owner with an unbalanced budget.
Because entry costs to ownership are relatively high, a property will take a few years to become a profitable investment, which makes it a more valuable option for those looking for stability.
A twenty-something-year-old who wants to move around and maintain a large degree of freedom would usually be better off as a tenant. However, this requires more discipline in order to accumulate assets nonetheless.
The advisor
Different projects and ambitions come with different needs and financial horizons: starting a family, traveling around the world for a year, starting a business, etc.
An advisor will help you define the optimal strategy according to your needs, your horizons and the tax aspect of it all.
