From attending parties to raising kids to running a business, life is busy. Amid the joys and stresses of daily life, staying on top of your finances can be a challenge, let alone finding time to plan for the long term. And even if you had the time, how are you supposed to know what’s important for your financial future and when you need to take action?
As November is Financial Literacy Month (#FLM2018) in Canada, we’ve created the Your Money, Your Life series aimed at addressing these questions and highlighting key financial considerations for different age groups. Every individual is unique, so these aren’t hard-and-fast rules. Instead, they are signposts meant to guide you toward financial decision-making that makes sense for your situation.
The following article addresses financial matters of importance to Canadians in their 20s.
Building your financial foundation
For many Canadians, independent life starts in your 20s, and with it come all the freedoms and responsibilities that go with setting out on your own. Whether you’re starting your first full-time job or moving into an apartment of your own, there are endless financial decisions that are now up to you, not your parents.
So what are the key financial considerations that should be on your radar at this age? The following are a few of the major financial issues and milestones common among your peers in their 20s:
- Embarking on your career
- Paying off student debt
- Renting an apartment while saving money to buy your first home
- Spending money on travel, a car and other major expenditures
The specifics of your life are unique to you and depend on factors such as where you live, what you do and the goals you are pursuing. Nonetheless, there are basic financial steps that make sense for most people in their 20s.
Taking action for long-term benefits
From a financial perspective, your 20s are the time for building the foundation on which your financial future will take shape. At this age, it’s not about having huge financial resources; instead, it’s about making smart decisions that will help you build your financial resources strategically and efficiently in the decades ahead.
While it’s always possible to come up with excuses for not taking action, you can skip the regrets and instead celebrate your foresight when you’re older by getting the ball rolling now. Here are three key steps that you can take in your 20s to set yourself on course for a bright financial future:
1. Avoid new debt. If you recently completed your studies, you may still have student debt – especially if you had a particularly long or expensive education, such as studying medicine or law. Paying off this debt should be a priority, so it’s a good idea to build regular payments into your monthly finances. Depending on your income, this may take a while, and that’s fine. Data from the Canada Student Loans Program indicates that Canadians typically take between 9 and 15 years to fully pay off their student loans. In the meantime, however, you should strive to avoid taking on new debt. How? Paying off your credit card bill in full each month and buying a used car instead of a new one are both good places to start.
2. Make the most of your money. As you start out in your career, chances are that money is tight. After paying for essentials like rent and food and putting money toward paying off your student debt, there may not be much left over. However, even small amounts can add up to big sums over time. By making regular contributions to registered investment accounts like a tax-free savings account (TFSA) or registered retirement savings plan (RRSP), you can use time and tax advantages to help your money grow. According to Statistics Canada, TFSAs are the most popular among younger Canadian households where a major income earner is younger than 35 years old.
3. Protect yourself and loved ones. Being young and healthy in your 20s doesn’t make you invincible, but it can do the next best thing: help you protect yourself and your family financially. This is easy to do using life insurance to protect those you care about while investing in a tax-efficient way for your future (permanent life insurance is a valuable investment tool), as well as disability and critical illness insurance to protect your financial well-being in the event that an injury or illness leaves you unable to work. Yet despite the great advantages of having insurance, 48% of Canadians in a survey by investment firm Edward Jones reported being underinsured. There is no better time than in your 20s to obtain life, disability and critical illness insurance. Why? Because premiums are based on your age and health, and once you obtain coverage they are locked in, meaning you won’t pay more even if you encounter health problems down the road. Your time and good health in your 20s are two things you can never get back later in life, so it pays to act early.
Making a plan to guide you forward
In your 20s, time is on your side. At this age, you have an amazing opportunity to adopt a higher risk, higher reward strategy. With decades of strong earning potential ahead of you, there’s plenty of time for you to recover from any financial missteps. On the other hand, if you start now with smart financial decisions, you’ll likely be in a much stronger financial position in the future.
The best way to set yourself on the right course is by making a wealth management plan. Even if money is tight currently, developing a plan for what you’d like to achieve financially will help you identify the actions you can start taking now to make this happen.
Seeking out support from a trusted financial advisor can help you better understand your options and develop a wealth management plan that is tailored to your needs. For a discussion about how we can help you reach your financial goals, contact Rubach Wealth at (647) 349-7070