You're Getting Paid, Now What?
Money tips for those starting out in the workforce
Most people starting out in the full-time workforce have a similiar, yet vague plan; to save and pay down their student loans in no time. Somehow it doesn’t seem to happen. It didn’t happen for me. I started out with a decent starting salary at an accounting firm immediately after university. I lived a fairly ‘low-budget’ lifestyle. I always had roommates, didn’t make any big splurge purchases. But somehow, I just didn’t save anywhere near what I imagined I would. The reason: it’s just easier to spend than save. The world is designed this way. Restaurants, bars, Amazon… every company out there is trying to make it easier and easier for you to give them your money. So, what should you do with your money?
Get saving – automatically
The only guaranteed way to save is to make it happen automatically, with automatic withdrawals.
How to set it up
This should only take a few minutes. If you log in to your bank account online, you can usually create a separate account without even having to go into the bank. After that, you can set a certain amount to be transferred automatically, and time it along with your paychecks. That way you simply are going to save. As long as you do your best to not dip into that account for spending. Don’t worry too much about the monthly amount. Just try out whatever you think you can save at the beginning and then adjust if you need to going forward.
Now what do you with your hard-earned savings?
Pay off your student loan (if you want)
Most recent grads want to pay off their student loans as soon as possible. There are a few reasons why this might not actually be the best move.
Let’s consider both sides:
Why you should pay it down
Easy goal to work towards
Peace of mind – the feeling of being debt free
Can brag to your friends
Why it’s the best loan to have
Has no effect on your credit (just don’t go into default!)
Ability to pause payments if in financial hardship
Tax credit!
As an accountant the last part excites me, more than most. But it should excite you too.
The numbers
Ontario student loans currently charge 5% interest, but since you can get 20% of that back on your taxes, the actual rate is only 4%. If you invest in the stock market on the other hand, you can usually expect a return of 5-10%.
So, your money can actually do better being invested than being used to pay down your loan. If you just pay your minimum loan payments and invest the rest, you can:
Build overall wealth quicker
Have an accessible rainy day fund
How should you invest your money than?
Open up a TFSA
A Tax-Free Savings Account (TFSA), is not a savings account at all. It could more appropriately be called a tax-free investment account. The tax-free part means any money you make off the investments in the account won’t have to go on your tax return. So, you won’t be paying any of the profits back to the government.
How to open a TFSA
Your Bank
Online 'Robo-advisor' (WealthSimple, Wealthbar & others)
The differences
Service – Your bank will give you much more personal service and be available to answer any questions.
Ease – Robo-advisors are designed to be the easiest to set up online, however they don’t have that human advice element if you need it.
Fees – Robo-advisors like WealthSimple charge much lower fees. Generally, about half a percent. While banks usually charge 1-2%. This may not seem like a lot, but if you made say 6% on your investments this year, you might only get to keep 4% (6% less 2% fees).
The numbers
You can only put so much into your TFSA, but the amount you can contribute grows each year, once you’re past 18 years old.
For example, someone born in 1997 turned 18 in 2015, therefore can contribute:
$10,000 + 5,500 + 5,500 + 5,500 = $26,500
Once you get to that amount, it’s probably best to just pay down that student loan already.
