I want to be like a squirrel putting away nuts for the winter.
May 15, 2010 2:03 PM
Twenty-something Canadian girl would like some financial and investing advice.
Hello, strangers on the internet. Give me some financial advice.
I'm approaching my mid-20s, graduated from university less than 3 years ago, have paid off all my student debts, have a good amount of savings, and a decently-paying job in a field that I am interested in.
Lifestyle-wise, I'm living pretty frugally. The cost of living in my city is high, so I'm living with the folks for at least the next 2-3 years so that I can save to buy my own place. I have no car of my own (and no firm intentions of owning one yet, as public transportation works well for my needs). Most of my planned spending goes toward clothing, eating out, and entertainment. I have also traveled quite a bit and intend to continue pursuing this interest. I do not have a big monthly cell phone bill, nor do I spend above my means with a credit card. I occasionally have family obligations involving money (but this is not a major area of concern). Right now I have a chequing account and a high interest savings account - that's it.
I realize I am fortunate and in a good financial situation that not many recent grads can say they are in, so I would like to take advantage of this time to start researching investments and start responsible financial habits for the rest of my adult life. Otherwise, it's entirely possible that my money could be spent on frivolous things, or that I could spend my savings on something that I don't need due to peer pressure.
I've tried to look for some personal finance blogs, but many of them seem to be American or targeted toward an older audience. I am mid-20s-ish, living in a large Canadian city, and somewhat risk-averse about making investments. I am female, if it matters.
Any help would he appreciated! Thanks MeFi.
Hello, strangers on the internet. Give me some financial advice.
I'm approaching my mid-20s, graduated from university less than 3 years ago, have paid off all my student debts, have a good amount of savings, and a decently-paying job in a field that I am interested in.
Lifestyle-wise, I'm living pretty frugally. The cost of living in my city is high, so I'm living with the folks for at least the next 2-3 years so that I can save to buy my own place. I have no car of my own (and no firm intentions of owning one yet, as public transportation works well for my needs). Most of my planned spending goes toward clothing, eating out, and entertainment. I have also traveled quite a bit and intend to continue pursuing this interest. I do not have a big monthly cell phone bill, nor do I spend above my means with a credit card. I occasionally have family obligations involving money (but this is not a major area of concern). Right now I have a chequing account and a high interest savings account - that's it.
I realize I am fortunate and in a good financial situation that not many recent grads can say they are in, so I would like to take advantage of this time to start researching investments and start responsible financial habits for the rest of my adult life. Otherwise, it's entirely possible that my money could be spent on frivolous things, or that I could spend my savings on something that I don't need due to peer pressure.
I've tried to look for some personal finance blogs, but many of them seem to be American or targeted toward an older audience. I am mid-20s-ish, living in a large Canadian city, and somewhat risk-averse about making investments. I am female, if it matters.
Any help would he appreciated! Thanks MeFi.
I've just started reading Rich by 40, which might be a good read. It was written by a young Canadian woman. She's also written another book called Rich by 30, which might be more relevant to you.
posted by pised at 2:37 PM on May 15, 2010
posted by pised at 2:37 PM on May 15, 2010
Max out your RRSPs. You do not have to use the tax deduction in the year that you put the money in the RRSP, you can carry it forward. Max out your TFSA. Index funds are usually a good place for these things. Any of the Canadian banks will have free advice on this.
For medium term, you can do GICs, which are low risk for savings but, if you choose the appropriate ones, difficult to take money out of for frivolous purchases. (Difficult psychologically, not legally.) This will be your down payment. Again, a bank can give advice on these. Note that these are low interest to balance out the low risk. (You can have GICs in your RRSP or TFSA, but probably should have things which have better returns in those two.)
posted by jeather at 3:09 PM on May 15, 2010
For medium term, you can do GICs, which are low risk for savings but, if you choose the appropriate ones, difficult to take money out of for frivolous purchases. (Difficult psychologically, not legally.) This will be your down payment. Again, a bank can give advice on these. Note that these are low interest to balance out the low risk. (You can have GICs in your RRSP or TFSA, but probably should have things which have better returns in those two.)
posted by jeather at 3:09 PM on May 15, 2010
"Winter" in your analogy is generally retirement. By starting now, you will really be maximising that fund for your future because of compound interest, so it's a great time to get started - and even with a minimal monthly commitment, you can feel really good about enacting this plan.
Remember that you are probably already contributing to CPP, but you should make contributions as if that cushion doesn't (or won't) exist.
I think the common wisdom on savings is perfect for what you need. Draw up a budget, take all of your extra income and put it into three pots. First, make sure you have three to six months of immediately accessible savings in case you lose your job. Second, make sure you have a high-interest savings fund for down payment savings that will get you where you need to go on your home buying schedule. (The best savings account rates are often at online banks or local credit unions.) Third, start a simple retirement fund, like an RRSP (so that your funds, when you retire, are tax-free) and max it out each year.
When you have six months of savings, have made your downpayment, and are maxing out your RRSP, you can look at more advanced investing and stuff beyond "pay into it and forget it" but a strategy like this is a solid foundation, doesn't require market knowledge or investment mangement, and really covers the smart bases.
(I have no idea what a TFSA is - I'm not Canadian, sorry, I just looked into the basics for my Canadian dad - but if you can max that out too, yay!)
posted by DarlingBri at 3:29 PM on May 15, 2010
Remember that you are probably already contributing to CPP, but you should make contributions as if that cushion doesn't (or won't) exist.
I think the common wisdom on savings is perfect for what you need. Draw up a budget, take all of your extra income and put it into three pots. First, make sure you have three to six months of immediately accessible savings in case you lose your job. Second, make sure you have a high-interest savings fund for down payment savings that will get you where you need to go on your home buying schedule. (The best savings account rates are often at online banks or local credit unions.) Third, start a simple retirement fund, like an RRSP (so that your funds, when you retire, are tax-free) and max it out each year.
When you have six months of savings, have made your downpayment, and are maxing out your RRSP, you can look at more advanced investing and stuff beyond "pay into it and forget it" but a strategy like this is a solid foundation, doesn't require market knowledge or investment mangement, and really covers the smart bases.
(I have no idea what a TFSA is - I'm not Canadian, sorry, I just looked into the basics for my Canadian dad - but if you can max that out too, yay!)
posted by DarlingBri at 3:29 PM on May 15, 2010
I think one's 20s might be a bit early to start thinking about squirreling away nuts for winter. My advise is to keep travelling and live life and enjoy that youth while you have it. If building wealth is your goal, the best thing you can do at that age, actually, is get married / partner up. Put another way, meeting people and doing interesting things is not only more fun than saving pennies, but you may actually be financially ahead in the long run!
posted by TeatimeGrommit at 3:50 PM on May 15, 2010
posted by TeatimeGrommit at 3:50 PM on May 15, 2010
"Maxing out" your RRSP may not be feasible just yet, but do strive to put the full $5k into a TFSA each year as for many people TFSAs end up being a better "deal" than RRSPs. Maintain a few months of expenses (6? 12? advice differs) as an emergency fund in your high-interest savings account, and then contribute to your RRSP with what is left after your not-egregious discretionary spending. Talk to an advisor at your financial institution about your RRSP -- they will ask you a number of questions to come up with an "investor profile" for you and determine an appropriate investment strategy based on your goals. You can even draw upon that RRSP tax-free to the tune of $25,000 when you buy your first home using the "Home Buyers' Plan" so long as you replace those funds over the next 15 years, although doing so is controversial as you lose the gains from investing that sum during the time it is withdrawn.
posted by onshi at 4:29 PM on May 15, 2010
posted by onshi at 4:29 PM on May 15, 2010
FYI, money from an RRSP when you retire is not tax free, it is taxed as income. However, it is not taxed *now* as income -- anything you invest there now will reduce your taxable income in this (or any subsequent) year, but will come out as taxable income when you retire (and presumably have less income).
A TFSA comes out of your taxed income, but anything you take out of it or gains from it are tax-free.
Frankly, if you don't have rent expense, student loan, or other debt, there's no reason you shouldn't be able to max out both these accounts -- if you're spending more than 80% less 5000 on clothing, eating out, entertainment and travel, you need to look at your budget quite closely. (If you are paying your parents rent, you may not be able to max out the accounts.)
The rules for repaying your RRSP for the Home Buyers program are quite specific and often unexpected, and I tend to think that if you have the choice, you should split the funds you are saving for retirement from those you are saving for home buying. It depends a great deal on your exact circumstances, of course.
posted by jeather at 4:55 PM on May 15, 2010
A TFSA comes out of your taxed income, but anything you take out of it or gains from it are tax-free.
Frankly, if you don't have rent expense, student loan, or other debt, there's no reason you shouldn't be able to max out both these accounts -- if you're spending more than 80% less 5000 on clothing, eating out, entertainment and travel, you need to look at your budget quite closely. (If you are paying your parents rent, you may not be able to max out the accounts.)
The rules for repaying your RRSP for the Home Buyers program are quite specific and often unexpected, and I tend to think that if you have the choice, you should split the funds you are saving for retirement from those you are saving for home buying. It depends a great deal on your exact circumstances, of course.
posted by jeather at 4:55 PM on May 15, 2010
"..money from an RRSP when you retire is not tax free, it is taxed as income."
And because it can also trigger clawbacks to income-support and other government benefits that are means-tested based on this income, the marginal effective tax rate on RRSPs at withdrawal during retirement can be quite high. A recent C. D. Howe Institute paper on this topic has a discussion of this in relation to TFSA vs. RRSP.
posted by onshi at 5:08 PM on May 15, 2010
And because it can also trigger clawbacks to income-support and other government benefits that are means-tested based on this income, the marginal effective tax rate on RRSPs at withdrawal during retirement can be quite high. A recent C. D. Howe Institute paper on this topic has a discussion of this in relation to TFSA vs. RRSP.
posted by onshi at 5:08 PM on May 15, 2010
Glad you are already saving, a good rule of thumb is to have enough money squirreled away to meet your bills for 2-6 months without a job. It feels great to have that bit of money set aside. At the same time, contribute to the following:
1. RRSPs: you should definitely be contributing to them, this is the main way of saving for your retirement, has huge tax benefits, and up to $25k can be used as a down payment on your first home. There are different potfolios, but I split mine three ways:
- GICs that yield less but are safe, regardless of market conditions
- Index funds: these go up and down with the market, but historically increase over the long run (15-20 years) so the sooner the better. Another nice thing about index funds is their management fees tend to be lower than mutual funds.
- Mutual funds: a portfolio of stocks, bonds, currency, with portfolios available in varying degrees of risk, depending on what your goals are. Management fees are higher, and usually you're in for long term (5+ years)
2. TSFA: it's savings account where you don't have to pay the taxes on any interest earned. You can put $5K a year into it, the money is more liquid than an RRSP and unlike an RRSP you don't get dinged with taxes if you withdraw early.
posted by furtive at 5:11 PM on May 15, 2010
1. RRSPs: you should definitely be contributing to them, this is the main way of saving for your retirement, has huge tax benefits, and up to $25k can be used as a down payment on your first home. There are different potfolios, but I split mine three ways:
- GICs that yield less but are safe, regardless of market conditions
- Index funds: these go up and down with the market, but historically increase over the long run (15-20 years) so the sooner the better. Another nice thing about index funds is their management fees tend to be lower than mutual funds.
- Mutual funds: a portfolio of stocks, bonds, currency, with portfolios available in varying degrees of risk, depending on what your goals are. Management fees are higher, and usually you're in for long term (5+ years)
2. TSFA: it's savings account where you don't have to pay the taxes on any interest earned. You can put $5K a year into it, the money is more liquid than an RRSP and unlike an RRSP you don't get dinged with taxes if you withdraw early.
posted by furtive at 5:11 PM on May 15, 2010
That's a really awesome link, onshi. Given that, it's probably a good idea to put money into the TFSA account first in the future -- but again, if you do not right now have rent expense, there is no reason you cannot be maxing both over the next three years.
posted by jeather at 5:18 PM on May 15, 2010
posted by jeather at 5:18 PM on May 15, 2010
Well, jeather, every once in a while a stodgy think-tank like the C.D. Howe puts out something of relevance to regular people.
Another piece of advice is that you can set up your RRSP with a financial institution other than the one you do most of your personal banking if you want to. Many people I know are not particularly are not comfortable with retirement or other major investment planning with level or sales-driven advice found in a retail banking setting from the "big banks" in Canada. I get really cookie-cutter advice from my bank but don't have very complicated needs so haven't bothered to seek out anything independent yet. Inertia may keep me here, so I regret not having "shopped around" first.
posted by onshi at 5:27 PM on May 15, 2010
Another piece of advice is that you can set up your RRSP with a financial institution other than the one you do most of your personal banking if you want to. Many people I know are not particularly are not comfortable with retirement or other major investment planning with level or sales-driven advice found in a retail banking setting from the "big banks" in Canada. I get really cookie-cutter advice from my bank but don't have very complicated needs so haven't bothered to seek out anything independent yet. Inertia may keep me here, so I regret not having "shopped around" first.
posted by onshi at 5:27 PM on May 15, 2010
You're geting decent advice here but for your last paragraph, the elusive Canuck personal finance blogs, try Million Dollar Journey (very good) and the associated Canadian Money Forum, Canadian Capitalist, Four Pillars or Where Does All My Money Go. All the authors of these blogs are helpful and friendly people.
posted by jamesonandwater at 5:29 PM on May 15, 2010
posted by jamesonandwater at 5:29 PM on May 15, 2010
About saving for a house, it would probably be a good idea to put your money into GICs; even though they pay terrible interest rates these days, at least you know your money will be there when you need it. Choose a time frame when you would like to buy the house and ladder your GICs so that they all mature at around that time. For example, suppose you want to buy a house in 4 years: you would buy a 4-year GIC today, a 3-year GIC in a year from now, etc.
posted by Simon Barclay at 6:17 PM on May 15, 2010
posted by Simon Barclay at 6:17 PM on May 15, 2010
Thanks everyone; you've given lots of things to think about already. Please keep the advice coming!
posted by catburger at 9:20 PM on May 15, 2010
posted by catburger at 9:20 PM on May 15, 2010
I'm also in Canada. I started working full time for a corporation and they match my RRSP contribution up to a certain % of my paycheck. I have other expenses and am not so much thinking about retirement yet, but make sure that you put this matched percentage in if you work somewhere that offers this, otherwise it is turning down a lot of free money.
I invest in index funds because that is what Suze Orman said to do.
posted by Acer_saccharum at 9:50 AM on May 16, 2010
I invest in index funds because that is what Suze Orman said to do.
posted by Acer_saccharum at 9:50 AM on May 16, 2010
This thread is closed to new comments.
I think the biggest thing is to build a budget that includes saving (or investing) as much as you can. Choose a minimum amount X that should be saved, and figure out the maximum amount Y that you would be comfortable saving. Hopefully X is less than Y; then you make a firm commitment to saving X each month, and structure the budget so that you're actually saving closer to Y.
As for actual investment advice, I think the best advice I've heard is, when presented with a Good Thing, to ask "What would happen if absolutely everyone did this?" For example, if Everyone were to somehow decide that buying and flipping houses was a great way to make money, you would end up with something like the current American financial meltdown. In other words, avoid the too-good-to-be-true investments like the plague, and if people start deciding that your method of investment is the Best Thing Since Christ, it's probably time to change tactics.
posted by kaibutsu at 2:16 PM on May 15, 2010