This article is the second in a series on personal finance and investing at different stages of your life. As some issues may overlap the different stages of life, they could be covered in a prior or subsequent article. For the full series go here.
A major milestone in life is entry into the work force. Earning a full-time income for the first time can be an invigorating experience, especially while still free of major financial obligations such as a mortgage, or children. There is a great deal of disposable income available to spend on enjoying life: sporty cars, frequent dining out, and plasma-screen televisions.
But the disposable income can also be channelled into savings vehicles to get an early start on financial independence and other goals. Why wait for the mortgage and kids to come before "paying yourself" 5 to 10 per cent of your paycheque as most personal finance books discuss? You can reach your financial destinations much quicker if you've previously had a period to save 25-per-cent or more of your income.
Such high saving rates are not for everyone, of course. They are more for people who attach a high priority to financial goals such as becoming less dependent on a job before the usual age of retirement age, ensuring they have enough funds to help their children go to university or start a business.
1. If you attach a high priority to financial goals, continue to live more or less like you did before you got the job. Keep on living like a student or at home (but pay your parents a moderate rent or help out with household chores). Take the bus, subway, bike or walk. Learn to budget and keep track of monthly inflows and outflows of cash. Once you start living at, or beyond, your means, it's hard to go back. Plus, options are given up, like going back to school.
The Invest for Life series:
"My best financial move was selling my car and living in a cheap apartment in a commercial-industrial zone of my city," says Brad Hurley, who lives in Montreal. "[It]allowed me to pay off my remaining debt … save up for a 20-per-cent down payment on a house while also making decent headway toward saving for retirement."
2. The influx of income from the first job can seem like a windfall and may lead to spending that is later regretted.
"My worse move would have to be buying a new car right after finishing university. I was pumped about having a 'real' job and signed a lease without even checking how much it was going to cost me. What a waste of money," laments Tim Stobbs, a Saskatchewan engineer who writes the blog: Canadian Dream: Free at 45.
Adds Ed Rempel from financial planning firm Ed Rempel & Associates: "Early in your career, you may be tempted to try to impress people with your new income. Stay frugal … the book, The Millionaire Next Door is true. The millionaires we meet are usually frugal people."
3. One of the best investments to make after starting a job is to build up a cache of cash. "Build an emergency fund, say three to six months of expenses," says Adrian Mastracci, a fee-only portfolio manager at KCM Wealth Management Inc. in Vancouver. The other good investment is to pay off debts.
The return is risk free and equal to the pre-tax income you would have to receive to cover the lending rate. In other words, if the lending rate was 5 per cent and your tax rate was 33 per cent, paying down the debt would be equivalent to earning 6.6 per cent (5 per cent plus 33 per cent of 5 per cent) on a guaranteed investment certificate (in a taxable account). No where else can such a high, risk-free return be earned.
"Clear up education debt," advises David Shymko, an investment counsellor with Vancouver-based Macdonald Shymko & Co. But "don't focus only on your student loan … most are tax deductible, so the interest cost after tax may not be that high," he suggests.
4. The siren call of getting rich quick in the stock market is sometimes heard in one's youth - and those joining the work force for the first time will have the wherewithal to engage in this fancy.