Recent graduates and anyone else just leaving the nest are facing a daunting financial task: getting started.
Houses, as compared to incomes, are expensive. Student debts are crushing. Employment rates for young Canadians are dismal. Weddings are getting more extravagant and babies apparently need designer labels. Oh, and you might want to get your first reliable car.
So what can a twenty-something Canadian do to set up their finances properly?
For the time being, long-term investing is a bit of a façade. Learning to master the markets with your $50 monthly contributions isn’t a bad thing, but it does not mean you’re on the right track. You’ve got bigger, more immediate problems to sort out.
The first thing you have to do is disaster-proof your life. You’ve got almost half a century before you might be able to retire, but you could become disabled, die, or lose your job tomorrow. Mitigating those risks are your top concern.
Your single biggest asset, by a country mile, is your ability to earn an income for the rest of your life. If you become disabled and can’t work, the best-laid investment strategy will be useless without any funding. Make sure you have the proper disability insurance coverage. You might be covered at work, but if you aren’t, get a private plan.
If you have dependents who count on your income to maintain their lifestyle, you’ll need life insurance. Nobody thinks they’ll die before their time, especially when young. But it happens. If you insist on delaying, why not make a deal with your insurance agent. Let them know the date you are going to die so he can pop over the night before and set you up. Ah, yes. The hole in that logic is apparent. Get started by getting a quote today.
The next thing you need is a small emergency fund. Even if you have student or other debt, you need a source of cash in case your income is interrupted. While you are in the precarious situation of lots of debt and little savings, your need to have a surplus. How much? Well, enough for you to meet your monthly obligations and still come out in the black each and every month. The bulk of this surplus should go towards aggressively paying down debt, but build up a small cash cushion first in case there is an income interruption or expense aberration.
Accomplishing all this means you have to endure trade-offs: entry level compact cars, small dwellings that are perhaps not in your ideal location, and restraint on the entertainment indulgences.
In a time when there are no guarantees for your job prospects, it’s worth taking a hard look at what monthly commitments you are guaranteeing to others. If there is one thing young Canadians need to do to set their finances up for the long haul, it’s to pull back on the reins as long as they can.