When you’re young, finances are probably not the first priority you have in your life. But, you’ll soon find that money will become far more important to you as you grow older. Whether it’s saving for a vacation, buying a home, or getting ready for retirement, each of these goals revolves around one thing: your money.
But where do you start, and what steps should you take to ensure financial comfort in the future?
A.C. Waring & Associates is committed to providing you with the financial advice you need to achieve your goals and walk into a debt-free future. Today, we’re going to look at the steps you should take and when you should take them to ensure you’re always in control of your money.
Starting Off (Financing Basics in Your Late Teens & 20’s)
If you want to start on the right financial foot, your 20’s is the time to do it. In fact, this is the most important time to start taking a serious look into your finances because the decisions you make here will ripple throughout the rest of your life.
At this point in your life, you will most likely have achieved a steady income and have taken on your first debt responsibilities in the form of student loans, car loans, credit card debt, etc. So what are the steps you need to take at this age to ensure you’re set up for financial stability during your first steps into fiscal responsibility?
The answers are actually more simple than you think:
Know How Much Money is Going In & Going Out
The first step towards properly managing your money is understanding what you’re pulling in month-to-month and your expenses. This will help you get a much better understanding of your spending habits and allow you to determine what your needs and wants are.
Determining Needs & Wants
Needs and wants change from person to person. For example, if your job requires you to drive to the office or other locations, a car is a “need.” However, if you’re someone who lives in the city and near a bus route, a car may be a “want.”
So how do you differentiate between the two in your spending habits? The Canadian Government recommends a very simple 1-2-3 system:
- Essential items for living (i.e., clothes, food, shelter, minimum debt payments)
- Important, but not essential items (i.e., cell phone, Wi-Fi, car)
- Non-essential items (i.e., video games, movies, vacations, eating out)
Break these expenses down into their respective categories and look at the money you have leftover at the end of the month. With the money you have leftover, you can start some basic yet crucial saving habits.
Saving Your Money
The whole purpose of saving is to help meet your financial goals and protect you from events that could change your financial situation, like losing your job or experiencing a car accident. But saving is much more than just putting money into your savings account and letting it sit there.
In your 20’s, you should be setting up a savings strategy to ensure you’re reaching your short, mid, and long term goals. Some simple steps you should take are:
- Starting as early as possible to maximize savings
- Paying off expensive debts as soon as you’re able (this will help cut minimum payments and interest)
- Making a regular contribution to a registered savings account
Regarding how much you should be saving, the general rule is to put away at least 10% of your paycheque. However, depending on the accounts you’re saving in, you may be paying taxes that will cut into the amount of money you’re saving every month. In this case, you may want to look at savings accounts that are tax-free or taxes-deferred, like Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP).
Registered Savings Plans
Registered savings plans are accounts that will help you accomplish your goals, like retiring or buying a home. The main benefit of these plans is that they help defer taxes on your savings and help you generate compound interest over time. The two most common plans people have are:
- Registered Retirement Savings Plans (RRSP): Defers income taxes until you withdraw money from this account.
- Tax-Free Savings Accounts (TFSA): Waves taxes on all income put into the account.
Both accounts have an annual limit of what you can deposit, but try to max out these limits as much as possible each year as the compound interest will help grow these savings even more.
Starting With Investments
Where you start with investing all depends on your goals and overall risk tolerance. However, the most important thing to remember is to always invest with your long-term goals in mind. A great first step in investing is to look at guaranteed investment certificates or mutual bonds.
These options are very low risk and generally offer a steady return rate, but low risk investing won’t yield very high results. Individual stock investments are less stable but could bring in more money over time. So if you’re willing to take more risks with your money, you can look at stock options to purchase.
Expanding Your Wealth (Your 30’s to Your 50’s)
Your 30’s up to your 50’s can hold many different opportunities for your finances. Hopefully, you’ve maintained a couple of excellent financial practices in your 20’s that have further developed as you reached your 30’s, so now will be the time where you can execute some of the goals you may have:
Buying a Home
If you’re like most Canadians, buying a home is the largest financial decision you will make in your life. However, it’s likely you will not have the funds you need to purchase a home outright with the money you have saved. Instead, you will need to have a mortgage to pay off the house.
Mortgages are plans agreed upon by you and your banker that will include the amount of time you will take to pay off the mortgage (amortization period) and the fixed term you’ll pay at a specific interest rate. Lower amortization periods mean you’ll pay less interest by the time you pay off the house, but you will have larger monthly payments on your mortgage.
In the end, how you choose to pay your mortgage is entirely up to you. But, it’s important to understand that this is a decision you’ll be making considerable payments on for quite some time.
Saving For Your Children
Having children is such a fulfilling and rewarding experience for many, but it’s also expensive. Having a child is not a decision to make lightly or without financial forethought to ensure they have support throughout their lives.
If you’re planning on having a child, you should prepare to start saving for the event well before they arrive. One way you can start saving is by opening a Registered Education Savings Plan (RESP) to pay for their education when they go to university or college.
Certain grants and bonds can also help fund their education, including the Canada Education Savings Grant and the Canada Learning Bond. For both options, the Canadian Government will also deposit a certain amount of money a year to bolster your child’s education funds.
Maximizing Your Earnings
If your 20’s is about setting yourself up for smart saving habits, your 30’s, 40’s, and 50’s are going to be about expanding your wealth. There are a couple of ways you can achieve this, and some might work better than others.
The 2 most common ways to expand your wealth is by making smart investments or generating a passive income stream.
Smart investing, especially with large amounts of money, will take time, patience, and plenty of research to achieve a certain financial goal. If you’re always scrolling through the latest market news and have a good understanding of how the market fluctuates, this could be a fantastic option for you. Be careful, though; economic downturns and poor investments can end up costing you more money than what you earn.
One of the safer ways to generate a passive income is by creating a side-business. You can create a business from practically anything you’re interested in, whether it’s a hobby or selling products on platforms like Amazon or Etsy. Take these revenue streams and put them to work generating more income by placing them into investments or saving them in your registered savings accounts.
Finally, one thing that will be on your mind throughout this period of your life is the amount of debt you may have.
As of 2019, Canadians’ average amount of debt is nearly $73,000 per person, combining student loans, credit cards, mortgages, and more. If you find that you’re not able to make the minimum payments on your debt, your debt has gotten out of hand, and you will need strategies to help you resolve some of your financial problems.
A.C. Waring & Associates can help you in various ways to help ensure you can live while also paying back your debts. Some strategies can include:
- Debt consolidation, which places all of your debts in a single place to help you manage them better.
- Credit counselling, which is a service our team offers to help you get a clear understanding of your debts and steps you can take to manage them.
- Determining if measures like bankruptcy or consumer proposals make the most financial sense for you.
Each one of these options will come with its own set of benefits and drawbacks. If you’re considering any of these options, please speak to us today.
Retiring (Your 60’s & Onwards)
Your 60’s is when all of your financial decisions will come to a head, for better or worse. Most people expect to retire around this age, but it’s becoming more common to work through your 60’s. However, if you plan on working in your 60’s, it’s better to work because you want to and not because you have to.
Here are some tips that could help you maintain financial comfort without having to go back to working a full-time job:
Pulling From Your Registered Plans
As mentioned earlier, registered savings plans will help you save for retirement and any other financial goal in mind, and your 60’s is the time to start cashing in the benefits of your excellent saving habits.
However, be aware that the money you pull from your RRSP will also be taxed, so it might be a better fit for you to use funds in your TFSA accounts before using your RRSP.
But these aren’t the only sources of income you can enjoy in your 60’s; the Government offers various programs to help support you at this point in your life.
Generating an Income While Retired
If you’re older than 65, you should be looking to enroll yourself into programs like an Old Age Security (OAS) pension or even the Guaranteed Income Supplement (GIS) program. Depending on various factors, like your age, how long you’ve been a Canadian citizen, and when you start using these programs, you can maximize the earnings you make.
These programs, combined with the savings you’ve made throughout your entire life, will help ensure your retirement years are the most relaxing of your entire life.
In a Tough Spot? Our Team Can Help.
Whether you’re starting out with managing your finances, or have been handling them for years, every one of us could use a little support. If your debts are keeping you from enjoying the freedom you want, give us a call and we can help make sense of your money.