Q – I’ve just graduated from University, and I have a student loan. Some of my friends are thinking of taking a year off to travel. Some have said they intend to simply ignore their student loans because the government will eventually forgive it anyway. I’m not sure this is a good idea. Do you have any financial advice for new graduates? – Molly E., Toronto, Ontario
A – First off, in the good idea/bad idea dichotomy, your friends’ ideas are pretty much all bad. It’s true, graduation is exciting. But it can also be unsettling. If you have student loans, you’ll need to start paying those off. You can’t pay them off by “travelling” for a year. Yet you don’t want to rely on the Bank of Mom and Dad forever. And while crashing in your old bedroom can be a short-term option, it’s not really what you had in mind when you walked up the stage to get that diploma. So you really do have to find a job, and a place to live. It can all start to sound a bit overwhelming. But there are a few financial planning tips that can make the transition away from student life a bit less of a shock.
Start with the basics. Consider it “Personal Finance 101.” List what you earn and what you spend, what you own and what you owe. Yes, it’s something most students have never really thought about seriously, but if you don’t do it now, you’ll never get yourself on a sound financial footing.
Your most important goal
Your single most important financial objective is to pay down any student debt as fast as possible. A student loan is still a legal financial obligation, and it still racks up compound interest (that’s interest on interest). Simply not making loan payments or hoping for a reprieve through some government “debt forgiveness” program is a sucker’s bet. It could happen. But dodging a debt repayment will affect your credit rating. And that could affect your ability to get a loan for a car or a mortgage down the road. So just don’t go there!
If you truly are in dire straits, contact the lender of the student loan. Explain your situation fully and honestly. Chances are they’ll try to help you out in some way, shape, or form. Be proactive! Do not just simply miss loan payments or ignore payment demands if you’ve let it get that far. Remember that future car loan, credit card application, or mortgage are on the line.
Start financial planning
Financial planning is just about the last thing new graduates want to do. But at some point, spare a few minutes to think about your future – and I don’t mean all that obligatory gassy stuff you heard from the commencement speaker. Right now, you want to think about where you want to end up financially in, say, 10 years’ time.
If you’re planning on marrying your college sweetheart, starting a family, and buying a home, you’d better start thinking about saving and investing right now! Because this stuff ain’t cheap! And it doesn’t magically materialize out of thin air.
Save what you can
Find that job, and start a savings plan right now! Target a certain amount to put aside every month as savings. Some advisers say you should save 10% of your gross income. At your age, that’s probably still wildly unrealistic. So save whatever you can, even if it’s only a few bucks a week. Stick it in a Tax-Free Savings Account (which you can open at any bank). You’ll be surprised at how quickly it starts to add up. Especially if you invest the money in a tax-efficient way.
A Tax-Free Savings Account (TFSA) lets you invest your money in low-cost exchange-traded funds (you’ll need to open a brokerage account for these). If that sound too complicated, start with good-quality mutual funds, many of which typically let you make a direct initial investment for as little as $500 or even less. Your money grows inside the TFSA tax-free, and you can withdraw your funds tax-free. TFSAs are great for shorter-term savings goals. There are various rules about contributions and withdrawals, and a financial planner can explain all these to you.
Another option might be a Registered Retirement Savings Plan (RRSP), which lets you contribute a certain percentage of your earned income every year, in return for which you get a tax deduction. Funds grow in the plan on a tax-deferred basis, and are not subject to tax until you make a withdrawal. But RRSPs are generally for longer-term retirement planning, and are useful once you get into higher income brackets.
Right now, you’re at that sweet spot in your financial life where you can start with a blank slate and create a financial plan for disciplined saving, investing, and money management. Stick to it, and you will achieve great things, probably a lot sooner than you might expect. – Robyn
Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 647-352-5735, or by email at email@example.com for a confidential planning consultation. Follow Robyn on Twitter and Facebook.
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