All across the country, university and college students are finally donning their robes and mortarboards and stepping across the stage to receive their diplomas. It’s an exciting time. For many new graduates, it may be the first real taste of independence – finding a job, a place to live, paying off those student loans.
It can start to seem a little overwhelming. Here’s a roadmap that new grads can follow for financial success.
Keep living frugally
Although it may not really be what you had in mind when you threw your cap into the air, graduates who temporarily move back into their childhood bedroom can save far more than their classmates who are living in a downtown high-rise apartment with amenities. It also gives you the luxury of a patient job search – and you know your parents won’t kick you out of the house.
Once you find that job, don’t rush out to buy a new car. In fact, don’t rush out to buy anything. After housing, the biggest drains on a budget are usually eating out, entertainment, and clothes. After years of being a student, chances are you’re used to living on the cheap. Now that you’ve started receiving a regular paycheque, you may be tempted to start spending it on all the things you couldn’t afford when you were a student. I don’t expect you to sit on the couch with your parents and watch Netflix every Saturday night, but do try to ratchet down your spending and maintain your frugal habits for as long as you can. You don’t want to rely on the Bank of Mom and Dad forever.
There will be plenty of time to upgrade your lifestyle in the years ahead.
The first steps to being money-wise
Start with the basics. You need to make a list of what you earn and what you spend; what you own and what you owe. Write down all your obligations and the required monthly payments.
Creating and sticking with a budget on a consistent basis is important at any age. Start estimating and tracking your expenses. Don’t forget to include a category for fun, too.
There are several smart-phone apps available that make the job easier such as the popular Mint, and, for the entry level budgeter, Wally for iOS.
Over time you will develop a system that works for you.
Pay off your student loans
The average student debt load has climbed to over $28,000.
If you have student loans, you will need to start making payments. Student loans give you a six-month grace period, which gives you time to get financially settled. Interest will continue to accrue during your grace period, so starting payments as soon as possible helps you avoid substantial interest charges. Find out when repayment starts, how to make your payments and your payment options.
To help new graduates who are struggling to find optimum employment, the government will no longer require repayment of student loans issued under the Canada Student Loans Program until they are earning at least $25,000 per year (2016 federal budget).
Even though student loans have low, tax-deductible interest rates, they are still financial obligations.
If you are truly in dire straits, contact the lender of the student loan. Explain your situation honestly. There will be some way to help you out. Don’t just simply miss loan payments.
Not making these loan payments will affect your credit rating. Your future car loan or mortgage is on the line.
Start thinking about your future
Spare at least a couple of minutes to think about your future. It’s not typically something most students have seriously thought about. What are your long-term goals? They may pertain to your career, but could also involve where you want to live, marrying your college sweetheart, starting a family and buying a home. Think about where you want to be financially in, say, ten years time. Make a bucket list of the goals you want to achieve in life and when, e.g.– “I will buy a house at 35.”
This helps you start focusing on financial goals and ensures you’re earning and saving enough to support them. Plus, you can start taking the steps to get where you want to go.
Save what you can
Once you are working, with cash coming in and your obligations being covered, start your savings plan. Target a certain amount to put aside every month. Save what you can, even if it’s only a few dollars a week. You’ll be surprised at how quickly it adds up.
You can start with a simple savings account. That will give you the liquidity and resources to make important purchases when the time comes.
A Tax Free Savings Account is also a great way to save for important goals. Know the various rules about contributions and withdrawals.
One of the most effective ways to build wealth is to always pay yourself first. Saving and investing early helps a young investor use the power of compounding to their advantage.
Stop thinking you’re too young to start planning for retirement. Retirement may seem a long way off, but if your employer offers a company pension plan, there are huge advantages to joining as soon as possible, especially if your company offers matching contributions.
In time, you can open an RRSP which lets you contribute 18% of your earned income from the previous year. In return you get a tax deduction. Funds grow on a tax-deferred basis until you make a withdrawal. RRSPs are generally for longer-term retirement planning and useful once you get into higher income brackets.
You are at exactly the right stage in your life where you can start with a blank slate, create a financial plan for your future, and begin 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.