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Gen Y Money At 25 years old, this teacher is a study in disciplined saving

Todd Korol/The Globe and Mail

With a $70,000-a-year teaching job and some savings under her belt, Helen wants to map out her financial future, from buying a car to retiring one day. She's 25, single and living in Alberta.

Helen's other goals include going back to school for a Master's degree in education, buying a place of her own in four years and devising some investment strategies.

"I am looking for a relatively simple and efficient way to invest," Helen writes in an e-mail. She describes her risk tolerance as medium. "What financial investments would be best for my level of interest?" she asks. So far, she's been a do-it-yourself investor, having set up a self-directed brokerage account in her tax-free savings account.

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If she stays with her current employer, Helen will have a defined-benefit pension plan partly indexed to inflation when she retires at the age of 65. She wonders when she should start contributing to a registered retirement savings plan or whether she needs one at all.

We asked Morgan Ulmer, owner of Calgary-based financial counselling firm CentsAbility, to look at Helen's situation.

What the expert says

Helen has done an admirable job of saving during her career so far, Ms. Ulmer says. Laying this strong foundation was prudent because her cost of living will rise after she buys a vehicle and a home.

Helen figures she'll have to pay $30,000 for a car that she would use for anywhere from five to eight years. Helen is in the enviable position of having enough cash saved to pay for a vehicle outright. She should use this to her advantage. She could buy a new vehicle where paying cash triggers a "cash-back" bonus. Alternatively, Helen could buy a reliable used vehicle that will last her desired five-to-eight-year time frame.

For Helen, financing a vehicle would only make sense if she found a zero-per-cent financing deal that does not require her giving up a cash-back option, Ms. Ulmer says. If getting a zero-per-cent deal means forsaking a $5,000 cash-back offer, then the "free" financing is a red herring.

Helen should direct her surplus cash to fund her medium-term goal of buying a home. She plans to buy in the $400,000 range in 2021. After the car purchase, she will have $32,504 left in her savings accounts.

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If Helen can save $1,400 a month for four years, that plus the $32,504, earning 1 per cent a year in a savings account, will give her $102,350. (These projections do not incorporate Helen's TFSA savings.) "This savings plan would give her a 20-per-cent down payment of a home worth $512,000," Ms. Ulmer says. This amount builds in some allowances for real estate appreciation by 2021.

The extra savings could also cover any emergencies Helen might encounter over the next few years and give her more flexibility in her choice of a place to live. Any funds remaining could be used for a larger down payment or to help cover real estate transaction costs and furnishings.

Putting 20 per cent down is prudent because it would save Helen more than $15,000 in CMHC premiums over the life of the mortgage, Ms. Ulmer says.

Fortunately, Helen's employer will pay for her Master's program if she has been working for seven years. She plans to take advantage of this benefit and begin working toward her Master's degree part time in 2023.

Even though Helen has stated that she can tolerate some risk, a four-year time-horizon until she buys a house makes investing her savings earmarked for the down payment in market-based securities such as stocks or bonds unadvisable, Ms. Ulmer says. "The risk of a market decrease over a four-year time horizon could jeopardize her principal and the goal of a 20-per-cent down payment by 2021."

Helen's budget shows that she has an extra $1,750 each month. Assuming $1,400 a month is saved toward home ownership, Helen has an extra $350 to be saved or spent.

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Helen could verify the accuracy of her budget figures by tracking her expenses over the next three months. If in fact she does have another $350 a month, some of that money should be automatically invested in market-based securities within her TFSA. "With her down-payment savings already looked after, these extra savings give Helen a chance for higher returns, as well as the flexibility to use them toward her home purchase or another longer-term goal that may crop up over time," Ms. Ulmer says.

As for simple and efficient ways to invest, Helen is already using a trading account for her TFSA. If she is comfortable and satisfied with her current system, she can continue as is, the planner says. She should investigate the fees she is paying on her current investments and ensure she feels that she is getting value for her money. Some easy ways for a medium-risk investor to invest in a TFSA include low-fee balanced mutual funds or index exchange-traded funds. If Helen wants some investment guidance at a low price, she could also look into online portfolio managers, more commonly known as robo-advisers.

Does Helen need an RRSP?

"The short answer is no," Ms. Ulmer says. Helen's public-service pension will provide for a comfortable retirement, especially since she joined it at a young age.

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The person: Helen, 25

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The problem: Laying out a financial plan for the next several years

The plan: Use some cash to buy a car. Save $1,400 each month in a savings account toward a down payment on a house. Any extra should go to longer-term investments within her TFSA to shelter potential income tax. She probably doesn't need an RRSP.

The payoff: A clear path to the big goal of home ownership

Monthly net income: $4,525

Assets: Bank savings accounts $62,504; TFSA $12,923; estimated present value of DB pension plan $15,735. Total: $91,162

Monthly outlays: Rent $650; tenant's insurance $25; electricity $25; transportation $245; grocery store $300; clothing $75; gifts, charitable $40, vacation, travel $150; other discretionary $50; grooming $75; dining, entertainment $170; sports, hobbies $50; other personal $25; dentists, drugstore $50; cellphone, Internet $135; pension plan contributions $710. Total: $2,775 Surplus: $1,750

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Liabilities: None

John Heinzl discusses why dividends are the foundation of his investing strategy, and should be part of your strategy as well.
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