By Julie Jaggernath
If you’re a 20-something, having paid even a bit of attention to your money and personal finances over the past decade, you likely gained some valuable insights. You’re now standing on the cusp of making some of the smartest money moves of your life. And those of you who should have paid a bit more attention than you did, count yourselves fortunate that due to the unprecedented economic times of the past 10 years, a lot more attention is being paid to increasing the financial literacy of Canadians. The information is out there, free for the taking, if you’re ready for it.
Taking steps sooner than later to manage your financial affairs will not only set you up for success later in life, it will help protect your hopes, dreams and goals when life throws you a curveball. When you’re in your 20’s you have time on your side. This is such a huge advantage when it comes to personal finances and planning ahead financially.
Here are 9 smart money moves to make in your twenties:
1. Compound Interest is Like Financial Magic – Invest & Watch Your Show
A young adult starting out with a job that does more than just cover living expenses is in the ideal position to develop a solid savings habit. The sooner you start saving, whether in a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA), the longer you can take advantage of compound interest.
Money saved in your 20’s and 30’s adds up to more by the time you retire, than saving the same amount in your 40’s and 50’s. Start small, saving a little from each pay cheque for long-term financial goals; increase how much you save as your income goes up.
2. Don’t Get Carried Away - Wanting It All Right Now Comes At a Price
There’s nothing wrong with “wanting it all,” but “wanting it all right now” is where the problems start. Take moving out on your own into your first “real” apartment. It’s a milestone young adults, as well as their parents, look forward to. If you have an expectation to move out with all the comforts of home, keep in mind that your parents started out with much less than you’ve gotten used to now. Don’t get carried away charging a lifestyle you can’t afford. Start with modest accommodations, good used furnishing and money left over for emergencies.
3. Pay Off Your Debts, Resist Thinking That Debt is Normal
Being in debt has become such a normal way of living that the urgency to pay off education debts, including student loans, credit cards and personal loans, becomes less as time goes by. But the truth is that the money you need to repay your education debts will hold you back from other goals and pursuits.
You might think that you’ll make bigger payments when you earn a higher income, but the longer you’re out of school, the more important other opportunities and commitments tend to become, and the harder it is to pay for the past. Ultimately, it’s a smart money move to deal with your debts in your twenties and start your thirties ready to invest in your future.
4. Go Through the Process to Figure Out How to Live Within Your Means
Before you can live within your means, you need to know what your means are. Create a realistic spending plan using an interactive budget calculator that helps you make adjustments to your budget until it balances. Track your expenses to get accurate details about your spending habits and adjust your budget accordingly. Ensure that you’re saving for long and short-term goals and developing positive money skills and habits. Once your budget is balanced and you are not spending more than you earn, then you’re living within your means.
5. Choose a Partner & Friends Who Share Your Money Values
Living within your means also means choosing friends, and especially a partner, who share your values. Splurging periodically is different than living a lifestyle based on low monthly payments. If your friends routinely spend more than you’re comfortable spending, get to know new friends who share your money values and who support your financially savvy lifestyle choices.
6. Build a Positive Credit Rating
Using credit wisely and conservatively is the best way to build a good credit rating, e.g. one credit card with a low limit that’s paid in full when the bill comes; a cell phone on contract that’s paid as agreed; and/or a modest car loan with regular payments made on time. These are ways to build a solid credit rating that positions you well to borrow more when the time comes.
A favourable credit rating is essential when it comes time to buy a home or apply for a business loan. As a young person, you might have more on your credit report than you think. Student loans while you’re not in repayment are reported as a lump sum. Once you begin repayment, your credit report shows whether you make your payments as agreed and on time.
If you’re not sure if you have a positive credit rating or not, or you might have lost track of some of the debts you owe, rather than wonder, contact the Credit Counselling Society. If you live in Metro Vancouver, the new credit reporting service can help. If you live elsewhere, a Credit Counsellor can answer your credit rating questions.
7. File Your Income Taxes
Filing your income taxes is part of a smart money management strategy, however there are countless excuses why people don’t file. Most people in Canada actually get a tax refund when they file, which is money they can put towards their financial goals.
If that’s not enough to convince you, here are 3 more reasons why you want to file:
- When you file your taxes, you start accruing contribution room for your RRSP. This room is needed the following year to make your contributions and to pay less income tax.
- You many also qualify for tax credits and income-tested benefits based on your declared income, e.g. GST refunds.
- Furthermore, federal student loan interest is tax deductible when you file your income tax return.
8. Collect Your Benefits
There’s a lot involved with becoming self-sufficient, and some of that revolves around a first “real” job. Young adults who are finished school or are past their mid-twenties are usually no longer eligible for extended health and dental benefits through their parents’ employers. It is important that once you’re on your own, you become familiar with your own employer’s policies and benefits, because every workplace has different coverage.
Utilize dental and extended health benefits for everything from continuing education course reimbursement, travel medical coverage, help paying for contact lenses, prescriptions, or dental work – it all adds up and can put money in your wallet if you know where to look.
A huge benefit to look out for is if your employer offers an RRSP matching program. Be sure to get maximum benefit from it if they do; it’s like free money, an instant return on your investment.
9. Live a Little – It’s a Smart Financial Move for Your Twenties
Living it up a little is a smart money move to also make in your twenties. Money is meant to be spent; and saved money is simply money you have planned to spend later. Sometimes we get so focussed on saving and planning for the future, that we forget to live a little. Set up a short-term savings account with money earmarked for guilt-free living it up! However, avoid over-committing with payments and long-term financial obligations. It’s definitely much easier to keep your lifestyle reasonable in the first place, than scale back later on when you want to make room in your budget for a mortgage, housing expenses or a family.