Use My Financial Advice for Young Adults
January 2019
- You must do it.
Only you, not your parents, not your investment advisor, not your insurance broker, not your lawyer and not your tax preparer, are responsible for your financial affairs. Understand what you are doing and know the risks of doing it and not doing it. Get second opinions, research on the Internet, ask questions and read. Your high school friends will call to sell you something because they need to make money – don’t give them your money unless you really need what they are selling. - Remember time flies – ask your parents.
By the time you are thinking of buying that home, having children, educating those children and retiring, it will be too late to start saving. See rule 1 again. A little bit each pay cheque set aside in the appropriate savings vehicle for your future needs – a Tax Free Savings Account, a Registered Retirement Savings Plan, a Registered Education Savings Plan, a high interest savings account or a regular investment portfolio. A Certified or Registered Financial Planner can guide you. - Don’t buy it if you can’t pay for it!
Try to have cash in hand before incurring bills. When looking at buying your “play toys”, do the math and figure out how long you need to work to pay for it (after taxes). Is it really worth it? There are a few exceptions to this rule if applied carefully. Can you pay off your credit card in full every month? If not, do not use it. Can you afford to pay a regular house mortgage payment after making a 20% down payment, even if interest rates go up by 3% at renewal, and still have enough money in the bank for an emergency (i.e. three to six months of living expenses)? Remember – no debt is good debt, and anyone that tells you otherwise is going to sell you something from which they make money at your expense. - Do not travel with rich (or stupid) friends.
Do not eat at expensive restaurants, take lavish vacations, stay at expensive hotels and drive a luxury car if you cannot afford it. See #3 above. The three reasons many people are in financial trouble or cannot retire are (a) expensive homes; (b) expensive or too many cars; and, (c) travelling with, and spending the same as, rich friends. - Start saving for retirement now.
A little bit each pay will not be missed, and remember, time flies. While investment rates may be low, compound growth is magical, especially with tax-assisted growth, but even the principal itself grows quickly with regular savings. And take advantage of all opportunities to multiply your money – tax-deductible / tax-free savings plans (RRSP / TFSA), employer pension plans, employer-matched savings plans, government grant-assisted savings (registered education and disability savings plans). If you save a regular amount each payday, say $50.00 per week, and do this from age 26 to 65, you would have saved $104,000 in principal. Add 5.0% interest to this, and you will have total savings of $314,000. You should be impressed by this balance with saving only $50.00 per week! Now consider the person who starts early, and saves from age 26 to 45 (20 years) and then, against good advice, stops. This person will have saved $52,000 in principal, which will grow to $228,000 by age 65 when interest is included. Compare this to the person who only starts saving at age 46 and continues to age 65 (20 years again). While the principal amount saved is the same ($52,000), with interest, it will only be $86,000 at age 65. The first person will have $142,000 better off because of the earlier start on interest compounding. Conclusion – start early and you will accumulate a lot more wealth – even small amounts count. Use an automatic savings plan to transfer money from your chequing to a savings account each payday to ensure you are consistent – 5 to 10% of net pay is the minimum recommended amount; 10 – 15% if you have no employer sponsored savings or pension plans. - Get a job you enjoy.
Finish, or start, a post-secondary education program and work towards a job you will really enjoy doing each day. Then, it becomes a pleasure, not “work” and success will be so much easier! Our most successful clients, regardless of the type or amount of education, are those who enjoy their work, which means that they naturally want to do a good job without really trying. - Find a mate with similar interests, similar financial skills and similar education as you.
Over a lifetime, you will need to be able to talk about common interests and share your experiences with someone who understands and appreciates. While no offence is intended by this author, one of the reasons for a 40% divorce rate is that professional doctors married to tradespeople, have interests that may drift apart in their mature years. Although both start out the same, interests diverge as time goes on because of their work life and work colleagues . High school romances usually require similar paths through life to be successful, and the tough decision today to go separate ways will be much easier than a future divorce with children involved (both emotionally and financially). - Buy appropriate insurance.
And, only buy appropriate insurance. Buy enough of the right type to protect your income and your assets, but not excessive amounts that waste unnecessary dollars. At a minimum, insure your house or apartment contents, your automobile, and your income earning ability (disability insurance). If you have dependants relying on your income, you need life insurance and likely health insurance. There are many types of insurance, so working with a qualified financial planner to give you professional and objective advice is critical. - Surround yourself with knowledgeable advisors.
Seek experienced and professionally designated individuals to help you with investments, insurance, taxes and legal advice. But always study the advice yourself to ensure you understand it completely. Ask questions, push back on advice that sounds weak to ensure your advisor is not an unscrupulous con artist, even if they come highly
recommended, and re-read point #1. Remember how hard money is to get – do you want to have to earn it all over again? - Consider doing your own tax return.
This will help you understand your finances, but only do it if you are willing to read the general tax guide. After doing your own tax return, visit a professional tax preparer at least once every three years and review it with them to ensure you are not missing any savings or making any mistakes. If hiring someone else to do it, ask for someone with several years experience! Before meeting, write down all of your questions in advance to ensure your meeting is thorough, effective, efficient, and therefore, well worth the cost. - Prepare your Will and Power of Attorney now.
As soon as you are out from under the wing of your parents, you should do this. I consider it mandatory if you have a spouse or children, and/or if you own anything of value. You can obtain a lawyer referral through the Community Legal Information Association in PEI, or via the public legal information associations in other provinces. Free information about these documents is also available on their web site (www.legalinfopei.ca), as is valuable information about other important topics, such as separation and divorce, long-term nursing care, how the legal system works, etc. Consider a Health Care Directive also. - Be professional, honest and hardworking in all you do.
This will build mutual respect with your employer and your colleagues. Burn no bridges, i.e., if you are terminated from a job, hold no grudges – learn from it and be professional with your former employer. Times may change and you may need their support in the future, or they may need you. Abide by the law, even when others suggest it is okay, e.g. tax evasion by not reporting all of your income. It takes a lifetime to build respect, and an instant to lose it forever. - Save for the future.
Save for the near future (7 – 10 years) in safe, fixed income savings plans. Invest for the long-term in high quality investment portfolios that contain a diversified mix of fixed income and stock market equity types of investments. Work with a qualified investment advisor, but double check the recommendations yourself through reading and research. Ensure you understand how your advisor is being paid to ensure they are being objective and working to increase your wealth, not theirs. See point #1 above. - Always shop smartly.
Many day to day requirements are regularly sold “on sale”; buy in bulk at discount prices for things you will always need – personal supplies, detergent, toilet paper, etc. Buy at end of the model season for appliances, automobiles, technology gadgets, etc., or buy used. Repair instead of replacing. If service at a restaurant or hotel is unsatisfactory, complain to management (in a polite professional manner), and you may be surprised how often you will receive a discount. Even when investing, ask for a better interest rate on your guaranteed investment certificates or lower commissions on your stock purchases – organizations that want your business will try to give you something extra. - Lead an active lifestyle, eat the right foods and live healthy.
How is this financial advice? The cost of health care is rising rapidly, much of which is not covered by government, along with the number of senior citizens. You can expect to pay more in the future as the government cannot afford to meet these challenges, both for medical needs and the cost of senior’s nursing care. You may also need to help out your parents in their later years with the cost of care. The cost of premiums for medical insurance (if you are healthy enough to be able to buy it) will likely rise as well. So, plan ahead by setting aside some savings, and following a healthy lifestyle. In addition, mismanagement of your financial situation leads to stress, and stress often results in poor physical health, marriage problems and bankruptcy – none of which you need. - Balance your fun today with your enjoyment for tomorrow.
Spend enough today to have some fun, but plan ahead and save a little now to ensure you can enjoy the rest of your life. Don’t let life pass you buy without enjoyment, but don’t be careless and give yourself a financial struggle for the rest of your life – decisions you make each and every day have a bearing on your future. See point # 2 above.
Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum