How can a debt free mid-20s couple be smart about their money?

November 17, 2010 7:34 AM

My wife and I are mid-20s, debt free and aren't sure what to do with our savings (we do not want to purchase real estate yet). How can we find out more about being smart with our money?

We're a relatively frugal professional couple with few fixed expenses beyond rent and other bills. Our budget ends up giving us about $2000/month for savings. We are completely debt free with good credit scores.

We live in Vancouver, where the real estate market is still absolutely insane. It's slightly less insane than a year or two ago, but certainly not enough that buying makes any sense. So while we'd like to consider maybe getting a mortgage in ~3 years, between now and then, we'll keep renting.

We'd like to do a little traveling between now and then, but nothing that would exceed a few months worth of savings total. No major financial plans beyond that.

So we're not sure what to do with our savings between now and then. We've got a bit of our savings in RRSPs and the rest in a "high interest" savings account, but it seems like we gotta be able to do better than 1.35% interest.

The only caveat is my wife is very concerned about risk. So something as risky as straight-up stock investment is probably going to be a real hard sell.

I'm not necessarily even looking for advice, I'm looking for where to find advice. Are there canonical books on this topic? Our pretty awesome credit union can financial advisors, but they obviously have an interest (no pun intended) in getting us to use more of their services.

Searching came up with a couple older questions, but they're nearly four years old and the economy (seemingly?) has changed a lot since then. Thanks!

posted by Nelsormensch to work & money (15 answers total)

I like thesimpledollar.com and getrichslowly.org.
posted by TheBones at 7:43 AM on November 17, 2010 [1 favorite]

Look into setting up an IRA. Mid twenties is the right time to do this, and the money will grow like crazy. This is a pretty super safe thing to do.
posted by xammerboy at 8:07 AM on November 17, 2010

Oh and I assume you maxing out your 401K.
posted by xammerboy at 8:09 AM on November 17, 2010 [1 favorite]

Yep, agreed that you need to start maxing out the Canadian equivalents of 401ks and roth iras. You're leaving money on the table if you're not investing in tax exempt/deferred investment accounts, even if just in safe bond funds or the like. Additionally many of those accounts come with employer matches, which is also free money.

The typical advice with inexperienced investors is to dollar cost average into some sort of index fund (S&P or the like) and/or target date funds.

But yeah, get thee to a flat fee and/or free financial advisor and they can give you guys more advice on this. This is pretty much their job. The flat fee is so that they're not invested in getting you into a specific investment (where they make money on each and every transaction) so that you can feel you're getting fairly unbiased info.
posted by jourman2 at 8:16 AM on November 17, 2010

I have always liked The Motley Fool. The forums in particular are really neat.
posted by restless_nomad at 8:29 AM on November 17, 2010

Note that I'm mostly familiar with personal finance in the US, but this advice be general enough to apply to you.

So we're not sure what to do with our savings between now and then. We've got a bit of our savings in RRSPs and the rest in a "high interest" savings account, but it seems like we gotta be able to do better than 1.35% interest.

If you're talking about only 3 years, you're not going to get much better than those rates with a legitimate safe investment. Without getting into the details, the savings account rates tend to match the interest rates given to banks by the government. Basically if you give a bank your money and ask them for a guaranteed rate of return, that is around the highest they can give you right now without losing money. You could rate-chase for the absolute highest interest rate around, but it's only going to be a few fractions of a percentage point higher. If the economy improves and the government decides to raise interest rates your bank will probably give you better rates, but today that is around the most you can get.

The only caveat is my wife is very concerned about risk. So something as risky as straight-up stock investment is probably going to be a real hard sell.

Diversified stock investment is really less about "risk" as most people would think about it and more about variance. Think about flipping a coin and taking three steps forward if it's heads and two steps backwards if it's tails. Over time you'll end up further than where you started, but in the short term there's still a decent chance that your next few flips will be tails and you'll be moving backwards. So if you're looking for long term gains put the money into a low cost diversified stock investment retirement account and let it grow over time, but if you'll need all of the money in a few years you'll have to trade some of those larger gains for the guarantee that you won't losing anything.

Really there is no magic bullet for investing that is much better than simple things like saving as much as possible and using traditional safe investments. You're already in a very good position financially and really you just need to continue what you are already doing and avoid doing anything foolish with your money. The suggestions above for reading personal finance blogs and using a flat fee financial adviser are good, but the advice you get will tend to be suggestions for minor tweaks rather than telling you about secret ways to make significantly more money in your investments.
posted by burnmp3s at 8:32 AM on November 17, 2010 [1 favorite]

Again, only familiar with the US finance, but do you plan on having children? Starting a Keogh or the Canadian equivalent might be good (it's a tax-deferred way of stashing funds for college in the US) now, as well as starting an account to save for a down payment on a property in the future might be helpful if you are maxing out your retirement already.
posted by medea42 at 8:43 AM on November 17, 2010

Maxing out your RRSPs and TFSAs is a good idea, but a better question is what you're holding in those accounts. A three- or five-year GIC can yield better results, for example, than a high-interest savings account (shop around), and it's still guaranteed and covered by CDIC, and can be held in either an RRSP or TFSA. You can hold GICs (or savings, or mutual funds, or stocks) outside an RRSP or TFSA as well, but you'll be taxed on the interest (or capital gains if applicable).

A mutual fund is riskier than that (but less risky than a stock purchase) and isn't covered by deposit insurance, but there are lower- and higher-risk funds out there: you will be more interested in so-called income or balanced funds rather than equity funds, or portfolio funds that hold several mutual funds at once, spreading out your risk. Keep in mind, too, that you're 40 years from retirement and can afford a couple of stock market crashes along the way.
posted by mcwetboy at 10:23 AM on November 17, 2010

When my wife and I were in a similar situation a few years back before we bought our house, we maxed out our RRSPs and put the money in GICs. Very safe, and a better interest rate than high-interest savings account or money market fund. I was always wondering whether I should be more aggressive about investing (e.g. put money into mutual funds or ETFs) but we're both risk-averse and when the financial system crashed we were very happy with our choice.

BTW, if at some point you do decide to buy a house, each of you can withdraw up to $20,000 from your RRSPs without penalty as long as you pay it back within 15 years.
posted by Emanuel at 11:21 AM on November 17, 2010

A three- or five-year GIC can yield better results, for example, than a high-interest savings account

This is absolutely true, but interest rates are pitiful right now. You may not want to lock in for 3/5 years based on today's rates. I had a non-RRSP GIC mature recently and was looking at putting it back in and ended up just dumping into a high interest savings.

But absolutely, do max your RRSP/TFSA.
posted by juv3nal at 12:02 PM on November 17, 2010

What you do -- especially if you're able to bank tens of thousands in savings each year (yow!) -- is buy a bunch of five-year GICs every year: this year's will be locked into a pitiful rate, but next year's will be locked into next year's rate, etc., etc. Averages out the highs and lows.
posted by mcwetboy at 5:22 PM on November 17, 2010

You ask this question at a particularly awkward time, with the near-meltdown of the international financial system only a couple years ago, and raging uncertainty about whether the stock markets are overpriced and due for a correction, when housing prices will bottom out, the quick ascent of gold prices in what may well be a bubble, what can be done about endemic unemployment, and whether we all face deflation or hyper-inflation. All the old rules-of-thumb are suspect in this environment. If I were you, I'd choose a low rate of return with guaranteed safety.
posted by exphysicist345 at 6:19 PM on November 17, 2010

Youngandthrifty is written by another young Vancouverite who's got some of the same goals as you guys.

Seconding anything by Gordon Pape, although you may have to customize a bit to adjust for the fact that you're young and not retiring soon.

Way to go, by the way... how many young Vancouverites can say that they're not in debt!
posted by graytona at 7:29 PM on November 17, 2010

Nthing maxing out your RRSP and TFSA - especially the latter, since it is MUCH easier to take out money from it and then repay it back into the TFSA without penalties. As you've noted, prices are INSANE in the Lower Mainland of B.C. for real estate, and you're going to want to reach a 20% down payment to avoid CMHC insurance if you can swing it on your property purchase roughly 3 years hence.

RRSPs have the Home Buyer Plan, but somewhat restrictive repayment schedules. $5K per year per person for the two of you will add up to about $50K (including last year and this year) in TFSA funds you'll be able to access and repay on your own schedule.

You will want to change your high interest savings account to People's Trust - they have an office in Vancouver, are CDIC insured, and their current rate (since Aug. '09) is 2.1%

You can comparison shop rates at RedFlagDeals.

Good luck.
posted by birdsquared at 10:04 PM on November 17, 2010

Great, this is real good start. Thanks everyone!

Everyone who took the time to read and provide Canada-appropriate answers, anyway ;)
posted by Nelsormensch at 9:19 AM on November 18, 2010