Part one of a series on investing during life's stages. For the full series go here.
The first step in the financial journey is important.
Getting off on the right foot greatly improves the chances of reaching financial goals, be they a comfortable retirement, an ample college fund for the children, or financial independence at an early age.
"If I had looked into the fundamentals [of personal finances]30 years ago … your mother and I would be very well off today," says David's 58-year-old father in David Chilton's book, The Wealthy Barber .
Perhaps the 10 financial pointers below will be of some assistance in helping teenagers and post-secondary students get started on a path that leaves no regrets.
1. In the teens and early 20s, investing in oneself takes precedence. Education, training and work experience build up a person's "human capital" and lead to a higher stream of income over their life span. "Your job and future career is the most important factor in achieving financial independence and security," notes Ken Hawkins, vice-president of research at Toronto-based financial advisory firm Weigh House Investor Service (www.weighhouse.com). Adds Jean Lesperance of the Canadian Financial DIY blog ( http://canadianfinancialdiy.blogspot.com): "One of my best financial moves was getting a degree in business that has … helped me get better jobs and earn more over my career."
The Invest for Life series:
2. Borrowing for post-secondary education, training programs, or starting a business is the good kind of debt, for reasons mentioned above. But it can go awry. For writer Craig Baird of Stony Plain, Alta., who wrote The Complete Guide to Investing in Index Funds ), it was one of his worse financial mistakes: "I got a degree … which saddled me with a $40,000 debt I only have now paid off. What made it worse was I never really got a job from that degree, and am in a totally different industry now." In short, it pays to be frugal and borrow less. Consult guides to economical living such as The Debt Free Graduate book (www.debtfreegrad.com). While in school, "pursue scholarships and bursaries," recommends Adrian Mastracci, a fee-only portfolio manager at KCM Wealth Management Inc. (www.kcmwealth.com) in Vancouver.
3. How much debt should a student assume? Tim Cestnick, a chartered accountant and author of Winning the Education Savings Game , recommends the Rule of 10s: a graduate needs to land a job paying $10,000 more than their total student loan in order to pay off it off within 10 years (works out to a monthly payment close to 10 per cent of income). Any bigger, and it could be too much of a strain when the time comes for mortgage, kids and other financial commitments. It might also mean a less comfy retirement: $3,000 put into a TFSA at the age of 22 would grow to $95,000 by retirement compared to $44,000 if done 10 years later (assuming an 8-per-cent return, as historically earned by stocks).
4. Many teens with part-time jobs have plenty of disposable income. Lacking financial obligations, it's easy for them to fall into habit of spending freely on trendy jeans, brand-name shirts, cellphones, and other things. Yet saving is critical to reaching financial goals, so the earlier one gets into the habit, the better. When Preet Banerjee, an Oakville, Ont.-based financial adviser, flipped burgers at McDonald's as a teenager, his father started him on a pre-authorized contribution plan with a mutual fund. "I put in $50 every two weeks, if I remember correctly," says Mr. Banerjee, who blogs at WhereDoesAllMyMoneyGo.com (www.wheredoesallmymoneygo.com).
5. Canada's tax system is horribly complex and many people miss opportunities to preserve or augment their finances because they are not familiar with all the details. Don't leave money sitting on the tax table: time invested in learning about registered plans, tax credits, and so on can yield major dividends. For example, an 18 year old who files a tax return and opens up a Tax Free Savings Account (TFSA) - even if there is no money to deposit - begins accumulating contribution room every year afterward. By the time they reach 25, they can put aside as much as $35,000 to compound tax free. Other reasons to file tax returns include claiming GST/HST credits and accumulating contribution room in registered retirement savings plans.
6. Many high schools and universities host stock-market contests, for example, the National Secondary School Stock Market Competition (http://invest.wlu.ca). They are best avoided. The emphasis is on picking stocks for time frames as short as two months. Often overlooked are the more important aspects of investing such as asset allocation, diversification, cost minimization, and long-term horizons. As John Bogle writes in The Battle for the Soul of Capitalism : "When we should be teaching young students about long-term investing and the magic of compound interest, the stock-picking contests offered by our schools are in fact teaching them about short-term speculation."
7. Credit card companies launch marketing campaigns on campuses each year, offering special low rates and free gifts for filling out application forms. Credit cards with unpaid monthly balances are not a good kind of debt because they finance mainly consumption items - and at rates near 20 per cent. "If I could go back and tell myself at 28 one thing, it would be to fight debt more diligently," remarks Alan Whitton, the middle-aged author of the Canadian Personal Finance blog (www.canajunfinances.com). "Pay off credit cards each month," warns David S. Shymko, an investment counsellor with Vancouver-based Macdonald Shymko & Co. (www.macdonaldshymko.com).
8. Young people are introduced to credit cards, payday loans, and other forms of borrowing before many are fully cognizant of the consequences of missed payments or paying off large debt loads. Use of credit is tracked closely at a central registry and used to compile a credit score that financial institutions consult whenever a person applies for credit; overspending and irresponsibility can thus result in an inability to borrow funds at affordable interest rates in the future. But even if debt is paid off on time, a large amount can take a long time to amortize and may limit or delay the purchase of a house or car. "If someone had sat me down and explained to me why I needed to care about managing my finances at the age of 16, I probably wouldn't be 29 years old and living in my mom's basement," said Adam Goodman, author of Following the Goods: Financial Management for the Young and Ambitious (www.followingthegoods.com).
9. Many parents introduce their teens to investing by buying some stocks for them, even if the amounts are small. First-hand observation of stock-market fluctuations can be a good preparation for the future and develop an interest in financial matters. It may also generate discussions around the dinner table on personal finances and aspects of investing such as asset allocation, compounding of returns, and passive investing. Popular investment choices are companies of interest to youth, such as Nike Inc. (running shoes), McDonald's Corp. (fast food), and Electronic Arts Inc. (video games). Another choice is mutual funds that accept regular, small deposits. Dividend reinvestment programs (DRIPs) with share purchase programs (SPPs) are also good for investing small amounts cheaply in stocks.
10. As the example of David's father in The Wealthy Barber highlights, it is better to learn about personal finances at an early age. Of note is the magic of compounding and the golden rule to "pay yourself first," which means to have a percentage of one's pay cheque automatically transferred into a savings vehicle. The earlier such advice is taken to heart, the greater the benefit. Therefore, to become more literate about personal finances, seek out mentors - those with experience who are willing to pass on what they know. And read the right books, starting with sources such as: The Wealthy Barber, by David Chilton; The Millionaire Next Door, by Thomas J. Stanley and William D. Danko; The Debt Free Graduate, by Murray Baker; Following the Goods: Financial Management for the Young and Ambitious, by Adam Goodman.
Here are some other links worth checking out:
- www.atozinvestments.com/investing-for-kids.html (finances for youths)
- www.themint.org/ (finances for youths)
- http://www.fcac-acfc.gc.ca/eng/consumers/iTools/CreditCardsAndYou/CCYStepProvince-eng.asp (credit cards)
- www.scholarshipscanada.com (scholarships)
- www.studentawards.com (scholarships)
- www.hrsdc.gc.ca/en/learning/canada_student_loan/index.shtml (student loans)