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My Top 10 Financial Tips for New Grads

Getting Off To A Good Start

October 12, 2013

Number 1 - Claim the tax credit for interest on your student loans 

If you have a student loan under the Canada Student Loans Act, the Canada Student Financial Assistance Act or similar provincial or territorial laws (bank loans don't count), you can claim the interest as a tax credit.  If you can't use the credit because you have no taxable income you can carry it forward, maximum 5 years, to claim on future tax returns.

Number 2 - File a tax return

Even if you have no income, file a tax return so you can claim refundable tax credits (like the GST credit).  If you have low income, below the taxable threshold, you should file to get back your tax source deductions, and to build RRSP room for the future.  Whatever RRSP room you do not use will accumulate, giving you access to a big fat RRSP deduction in the future.  If you make less than $25,000 you can use Turbotax for FREE to netfile your return.  Go to http://turbotax.intuit.ca/tax-software/free-tax-software.jsp for details.

Number 3 - Get into the savings habit, NOW

Once you start working you should begin saving with an automatic plan that, once in place, you don't have to think about.  At your bank, through your financial planner, or at work, have a percentage of your income put aside into savings.  Look at the numbers: if you make $40,000 per year and you save 10% of your income, that's $4,000 per year or about $335 per month.  That should be affordable; if it's not then you are spending too much! If you earmark those savings to an RRSP you'll be getting a nice tax break on top, so in effect it costs you less than $335 to save $335.  Set up the automatic plan before you go out to buy anything big so savings take priority.  Everything you do afterwards will take into account that 10% of your pay is for your savings, period.  And don't stop there ... if 10% works well, increase it to 12% next year, and more the year after that.  Want to be a savings superstar, then aim for 20%.

Number 4 - You own the supreme power of compounding, use it

The financial habits you begin today will serve you an entire lifetime.  You may not have a lot of money, but you have one of the most powerful tools the financial world has ever known at your bidding: compounding.  If invested wisely, your money will double many times over and a small sum will become a large sum.  This can be very hard to appreciate because it's not something you see with your eyes day-to-day, but it does happen! and should not! be ignored.  Use the Rule of 72 to understand the power of compounding.  The Rule of 72 calculates how often your money doubles based on your rate of return.  Here's how it works: 72 divided by your rate of return is the number of years it will take for your money to double.  So if you are earning 7%, your money will double every 10.3 years since 72 divided by 7 = 10.3.  So, at 7%, $10,000 becomes $20,000 in about 10 years, becomes $40,000 in another 10 years, becomes $80,000 10 years later, becomes $160,000 10 years later still.  Wow! This is the secret to building wealth.

Number 5 - Use your RRSP to save for your first home

The Home Buyers' Plan allows you to take $25,000 out of your RRSP tax-free to buy your first home.  Yes, you have to pay it back, but that's over a 15 year period that begins 2 years after you take it out.  This means you get a tax deduction for money that you can use to increase your downpayment: that's a pretty good deal.  Of course, you need RRSP room to use the Home Buyers' Plan and that means you need income, but you wouldn't be buying a house if you didn't have income.  Remember to keep the RRSP money earmarked for the Home Buyers' Plan in a safe investment.  That means no stocks!  Consider a short-term GIC, a money market fund, a short term bond fund, a 5-year laddered bond fund, a blue-chip corporate bond fund.

Number 6 - Check out your partner's money habits before you get hitched

It's very difficult, impossible?, to make important financial decisions if you and your partner have radically different views about money.  Different money values will pull you apart, lead to arguments and engender resentment over how the family uses its scarce financial resources.  You will not be able to build a joint plan to meet your different financial goals, which may very well compete.  You'll encounter plenty of stresses you never even imagined in this wonderful and bizarre journey we call life, don't add arguing about money to the pile.  

Number 7 - Once you have kids the money game changes, so be prepared

Children are expensive, no surprise there.  The cost of daycare in Toronto is frightening - $1,200 or so per month, and that's per child!  So before you go buying the big house and sports car and all the other toys your cashflow will afford, realize that your budget has to have a big chunk of room for the kids.  And I haven't yet mentioned one of the biggest expenses a new child brings: maternity/paternity leave.  Those 6 to 12 months, or longer if you decide to be a stay-at-home parent, will cost a fortune in lost income.  If you have a pre-baby lifestyle that requires all of your 2 incomes to maintain, where's the money going to come from for daycare, for maternity/paternity leave, for diapers, for the RESP?  Be careful or it won't be just baby crying at night.   

Number 8 - pay down your debt

Paying down debt is one of the greatest investments money can buy.  Every time you pay down debt you save the interest.  By paying down $1,000 of debt you save, assuming 10% interest, $100.  That's the same result as a 10% return on a $1,000 guaranteed investment.  But with the debt paydown, all of the $100 is yours to keep; whereas with an investment (if it's outside your RRSP), that $100 is not all yours because some of it goes to income tax.  For someone in a 35% tax bracket, paying down debt with an interest rate of 10% is equivalent to earning 15.5% in a guaranteed investment.  Imagine that, you can create your very own high-rate GIC - cool. 

Number 9 - Don't be in a rush to buy a home/condo

Visit a mortgage calculator before you decide to buy a home or condo.  Here are links for two of them:

http://www.mackenzieinvestments.com/calc/jsp/MortgLoanAmortScheduler/mortgloanscheduler.jsp

http://www.cmhc-schl.gc.ca/en/co/buho/buho_005.cfm

The bigger your downpayment, the lower your mortgage costs.  Lower mortgage costs mean more money for other things, like vacations. A bigger downpayment also makes it easier to have a shorter amortization, which means financial freedom a whole lot sooner. So stay in the affordable apartment a little longer and keep saving, and if you have a partner, try living on one salary and saving the other. 

Number 10 -  Once you start making money don't forget your student days

Once you start making money you may be inclined to start spending.  If you are feeling secure about your job and future career you may fall into the trap of spending dollars you haven't yet earned - it's easily done with debt.  Resist the temptation.  Otherwise, you may be setting yourself up for a lifetime of feeding a short-term material bliss habit which, like a drug addiction, requires more and more stuff to continually satisfy.  (The more you have, the less satisfied you become with what you already have).  You wake up one day with a whole lot of stuff, but no financial security, and not a lot of choices.  That's stressful.

Be well, and make good financial decisions,

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