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Financial Facelift

Tailoring ambitions to a timeline Add to ...

At 23 and fresh out of university, Kaitlin has the world by the tail. She's just started her first full-time job, in Edmonton, and already she has $5,000 in mutual funds, $4,000 in a tax-free savings account and $10,000 to invest.

Before starting her new job, she had been working at two part-time jobs and saving money.

Like most young people, Kaitlin has grand ambitions. First, she wants to buy a car, travel, and build an investment portfolio. Over three years, she aims to save three years' worth of living expenses plus tuition so she can get her MBA.

That's just the beginning.

In four years, she wants to buy a house, which she will rent out while she is studying, and live in later. Over four to eight years, she hopes to accumulate a large, diversified investment portfolio. Then she plans to buy a second property for rental.

Kaitlin figures she'll be earning $80,000 a year to start when she gets her MBA.

Can she do it all?

We asked Kurt Rosentreter, a senior financial adviser at Manulife Securities Inc. in Toronto, to take a look at Kaitlin's situation.

What the expert says

"It's great to see a young person caring about their finances," Mr. Rosentreter says. "Often, this line of thinking doesn't occur until age 35 when a baby is on the way."

Because Kaitlin clearly is eager to become a successful investor, she might want to start by taking an investment course and reading up on personal finance. He suggests the Canadian Securities Course, offered by the Canadian Securities Institute and Canadian MoneySaver magazine.

"My overall tip to a young person out of school is to get knowledgeable about financial planning and investing."

Kaitlin's desire to start saving now for her many goals is "noble," Mr. Rosentreter notes, "but I am concerned that she is biting off more than she can chew." He suggests she list her goals, including timelines, in order of importance, and then attach dollar amounts to them.

She could start by topping up her TFSA to the $10,000 allowed for 2009 and 2010 and treating the money as an emergency fund, which would typically be three months' income. Because this money is designed to be readily on hand, it should be invested only in low-risk products that can be cashed in overnight, such as a high-interest savings account.

He recommends she open separate investment and/or bank accounts for each of her other shorter-term goals, setting up automatic monthly transfers from her paycheque.

"Have one for vacations, another for the car she wants and other accounts for other goals," he advises. "These buckets of money will help her to focus on each goal separately."

Next, she should consider opening a self-directed registered retirement savings plan at a discount brokerage, contributing regularly until she reaches $25,000. Her contributions will give her a nice tax deduction while she is working.

Later, when she is ready to buy a home, she can consider withdrawing the $25,000 for a down payment under the federal government's Home Buyers' Plan.

The planner says to "be careful about investing too much in the stock market … Only invest in the stock market if you can be sure you will leave the money in place for a good five years or more."

Kaitlin may also want to take a long, hard look at her "investor profile" - her investing time horizon, knowledge about investment topics, liquidity and cash flow needs, discomfort with volatility and losses, uses of the money and tax bracket - "all go into deciding how to invest."

Until she is more established in her chosen career, buying a rental property and possibly even buying a home "may have to wait a bit," Mr. Rosentreter says.

"At the moment, putting away surplus cash in saving pools cautiously invested is a good first step."

He recommends Kaitlin look into a registered education savings plan. These plans now apply to students from 21 to 31 years, giving people a longer time-frame during which to use funds for graduate school. As well, many graduate schools have scholarships and bursaries for mature students.

Client situation

The Person:

Kaitlin, 23

The Problem:

How to save for grad school, buy a car, travel, buy a house and build an investment portfolio all in the next few years.

The Plan:

Arrange goals in order of priority and put a price tag on each one, open separate savings accounts, top up TFSA, open an RRSP and possibly an RESP.

The Payoff:

Successfully achieving the most important goals, one by one.

Monthly net income:

About $4,200.


Bank accounts $13,150; TFSA $4,000; mutual funds $5,000. Total $22,150.

Monthly disbursements:

Food and eating out $250; clothing $100; medical, drugs, dental $50; miscellaneous $300; rent $750; telephone, cable, Internet $60; replacement of furniture, appliances $50; vacations $200; entertainment, music, books $20; transportation $60; donations $20; gifts $20. Total: $1,880. Monthly saving capacity: $2,320.



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