Financial Focus In Your 20s – Part 2
Okay, so you’ve bought into the whole “don’t spend more money than you make” thing. You’ve made a budget, got both your fixed and variable expenses in check. What’s next? Step #2 is…
2. Start saving. Saving is a habit. You either get into the habit of saving and have something in the future, or you don’t. If you’re waiting until you earn more money to start this habit, you’ll never start because there will always be a good reason to spend all your money. In fact, as you get older and take on more responsibilities, it will actually get harder and harder to find the money to save, particularly if you aren’t already in the habit.
Saving is the act of not spending. It is a conscious decision not to spend. And when you save, when you accumulate a stash of cash for some point down the road, you give yourself options. Savings, whether it be for emergencies or for retirement, gives you the flexibility to cope with the crap life will inevitably throw you way. No savings, no options.
It doesn’t matter how little you start saving. Even $25 a month is a start. Set up a savings account to do an automatic transfer of money from your chequing account every month. As you earn more, set aside a part of all your new earnings to boost your savings. If you don’t, your lifestyle will inflate – you’ll get used to spending more money – and you’ll have nothing to show for your hard work later on.
Use a Tax Free Savings Account for your emergency savings. You’ll need to set aside a safety net equivalent to six months’ worth of your essential expenses. Use an RRSP to start saving for retirement. If you’re in the lowest tax bracket, don’t claim the deduction yet. Hold it for the years when you’ll be earning more and can get a bigger tax bang for your deduction. If your employer offers a savings matching retirement program and you’re not taking full advantage of it, you’re too stupid for words. Beer or shoes cannot be more important than the extra cash your company is throwing at you. Grow up!
3. Get your debt paid off. Whether you graduated with a ton of student debt or just a couple of thousand in the hole, get it paid off. This is your big “have to do.” That debt, left to fester, will grow more cumbersome when it comes time to go back to school, qualify for a mortgage, or deal with a reversal in fortune such as a few months of unemployment. What, you think because you’re young that you’re not vulnerable? Go a few months without a job and see just how heavy those loan payments get when you’re also trying to pay rent and buy food. Get rid of the debt. If it’s a small amount – say under $10,000 – you should bust your butt to have it gone in 12 to 18 months. For balances between $10,000 and $35,000, you may need to take up to 3 years to beat back the debt. For amounts even higher, it may take you more time to demolish the debt. But for every year it takes you, know you are paying through the nose in interest.
If you’ve also got some consumer debt – credit cards or a line of credit – what the hell are you thinking? You’re in your twenties and you’re already behind the eight-ball for the sake of some dumb stuff you just had to have? Time to make amends for your prior stupidity in spending money you hadn’t yet earned. Making just the minimum payment means you’re a dope. A $4,000 balance at 19% interest would take almost ten years to pay off if you made only the minimum payment each month. And you would pay an extra $2,435 in interest. I don’t care how many jobs you need to take on, get that consumer debt gone!
Financial Focus In Your 20s – Part 3