Investing for Young Adults
With mortgage debt, car loans and visa bills to pay off, are you really in any shape to start investing for your retirement? Many young adults and professionals feel that financial planning and retirement saving strategies are beyond their reach at this stage in their lives. If they can just pay off debt for a few more years, they’ll be ready to get started on a plan of their own. The reality is that the longer you wait, the harder it becomes.
It’s amazing how many times I meet people out in the community who say the exact same line to me – “I want to come see you in a few years when I have more money to invest”. Each time I tell them the truth, if they want to have more money to invest in a few years, they need to come sit down with me now. If you haven’t already done so, the time to sit down and create a proper financial plan is now, regardless of what age you are. Proper financial planning goes far beyond setting up and managing investment accounts. It must include debt management, budgeting, insurance and a wide array of other issues.
Budgeting will help young investors to understand their cash flow situation. This will also allow you and your advisor to find ways to reduce unnecessary expenses and free up cash for more important uses. Surviving properly off a smaller income in the early years will also better equip people down the road for future financial emergencies such as divorce or job loss.
A good plan for young adults will work to pay off your highest interest rate debt first and consolidate remaining loans into the best low cost option available to you. It will often (but not always) incorporate a plan to start your saving program now. You should start this off small and increase your contributions as your income level rises and/or you pay off more of your other liabilities. It’s important that you don’t set your contribution levels too high at the start, because you’ll undoubtedly be forced to stop these contributions before to long. The best way to save is automatically – with an automatic monthly contribution that goes out right after payday.
Your custom tailored financial plan will also look to utilize multiple account types including TFSAs, RRSPs & even RESPs for your children. Each type of investment is quite unique and plays an important role in your financial future. Allocating the bulk of the savings to an RRSP plan is often a good idea, but many people make a mistake in doing so. At tax time, when the CRA sends you a refund cheque due to your RRSP contributions, this is not the time to go shopping! For the RRSP program to work properly, you must apply this CRA refund to either your outstanding debt load, or back into your investments. Anything else and you’re missing out on the advantages of using the RRSPs to begin with.
Young people today must face the reality that many will not have the comfortable company pensions their parents now enjoy. The government is simultaneously reducing the amount and levels of support that they will provide. Now more than ever, it’s up to individuals to ensure that they’re on the right track for financial security and retirement. If you find yourself one of the people saying “I have to wait until I have money to invest”, now’s the time to reconsider.
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