[gracefully]

Hello, I'm currently 23 years old. I just recently graduated from college, and luckily found a job that pays me $3000/month.

In regards to my finances, I am dirt poor. I have $100 left on TD chequing account and $16,000 student loan from OSAP (Ontario Student Assistance Program) that I have to repay back in six months time. According to them, I will have to make monthly payments of $300. By the way, Ontario Student Loans have an interest rate of prime + 1%. I had various jobs in college to pay off some of my tuition, but had to rely on OSAP for the rest.

I'm just wondering whether I should first start paying down my student loan aggressively before thinking about investing or saving, or pay the minimum balance and start investing right away.

Currently, I live at home as I can't afford it to go on my own yet. My parents are both low-income earners, and I have always been driven to make something out of myself . I only started educating myself with regards to finance last year. It all started when I stumbled upon David Chilton's book - The Wealthy Barber, it opened my eyes to the concept of compound interest and the idea of pay yourself first, and that hey, maybe I can be financially independent someday through investing and saving.

I don't mind being frugal and living like a dirt poor student for the next few years even with my job. I'm willing to sacrifice the short term to long term gain. With that, I plan to breakdown my $3000 monthy salary into the following:

18% ($540) go to RRSP
12% ($360) go to TFSA
17% ($510) will go to my parents to help out
10% ($300) will go to the charity/church/ministry
27% ($810) will go to pay my student loan
16% ($480) will pay for my transit (I don't plan having a car yet because of the expense associated with it) and other miscellaneous stuff

My question is, should I be paying down my student loan faster? Also, what type of strategy should I use for RRSP and TFSA? I am willing to be quite aggressive since I'm still young. Does my salary breakdown sound realistic - should I change anything? Any advice for someone like me who is starting out will be greatly appreciated.

 

[PMREdmonton]

One big omission from your budgeting is taxes - I'm not sure how much in the way of existing educational tax credits you have but at some point you will have to deal with this.

I don't know how commited you are to charity and I find your spirit about contributing 10% of your gross salary admirable, but you may way to consider deferring this until you have finished off paying your student loan.

I would also suggest you defer investing in TFSA and RRSP until you have paid off your student loan. At your present level of income, you are probably better off using TFSA and then any additional savings could be put into RRSPs. Whether you should claim your RRSP investments presently depends on your anticipation of improvements in salary.

Lastly, you should also consider obtaining some disability and life insurance while you are young and healthy.

 

[FeeOnly.ca]

About disablity insurance: http://www.yourwealthadvisor.ca/apps/videos/channels/show/841341-protect-your-most-valuable-asset

Life Insurance FAQs: http://www.yourwealthadvisor.ca/apps/videos/channels/show/841341-protect-your-most-valuable-asset

What Insurance Do I need: http://www.compositefinance.com/whatinsurancedoineed.htm

I hope this helps.

 

[Berubeland]

Good Going

Dear Grad,

I think it's great. I too am broke as a church mouse people tell me i don't have enough money to invest.

IMHO there is no wrong amount to invest but rather the biggest mistake is not investing at all. What is the point after all it's only a few bucks.

Point is Warren Buffet started with a small few bucks too.

Personally I would open a TFSA with Questrade and buy something with a high dividend like Consumer Waterheater's Fund. Also set it on a news alert to your phone.... if they stop/reduce the dividends sell that minute or you'll lose your shirt. Every month you can buy a new stock if you like.

The reason I think you should wait for an RRSP is that if you take the money out because of emergency you lose that room forever. With the TFSA you can put it back in later if you have to take it out.

 

[Rickson9]

Take the time to learn and study. I would recommend reading anything by John Bogle and Peter Lynch to start. Educating yourself in finance will help you deal with financial planners, banks, real estate agents, etc.

I mean no offense, but your statement "I am willing to be quite aggressive since I'm still young." shows your inexperience. You don't need to be "aggressive" to make money. Because you are young is also not a reason to "be aggressive". Financial planners have the vocabulary of "aggressive" = "higher risk". There is no reason to endure the "risk" that most planners advise.

The irony is that the majority of age-based, "risk-adjusted", asset allocated, diversified portfolio advice has some of the worst returns I've ever seen.

 

[leslie]

1) Start paying $500 rent to your parents. And also pay $150 for food. Forget the 'help out' bit. Of course they are going to refuse. But that does not mean they 'mean' it. And even if they do, you still need to pay up to learn to be an adult and take responsibility and keep self-respect. Use those arguments to force them to take your money. Or put the $$ directly into their account at the bank. You can most probably find out their account number at home.

2) Susy Orman (US media advisor who I greatly admire for giving the advise people need to hear, rather than want to hear) has the opinion that there is good debt and bad debt. She puts student loans into the good debt catagory, and says paying them off should not be a priority.

I disagree. Debt is a sword over your head. The world of possibilities opens up when it is removed. I say pay it down as fast as possible.

3) Forget the RRSP/TFSA savings until all debts have been paid off. And you either move out or start paying your parents market rents ($1,000 ?).

4) Talk to your pastor (or ...) about this, but I'm sure s/he will agree. Instead of making cash payments give them IOU script. AND fully intend to honour it as soon as your debts are paid off.

5) Your focus at the start is on the savings part of the equation, not the investing part. Read this http://www.retailinvestor.org/saving.html.

6) You don't need any insurance because no one will be worse off financially if you die, and the probability of becoming disabled are infinitesimal (unless you are in a risky profession, which most insurance companies won't insure anyways).

7) You WILL want to buy 'things' like a car. Start the habit now and never break it, to save up BEFORE the purchase. Don't borrow just because everyone else does, or because your 'budget' promises you will have saved it by the end of the year. Do not set up automatic savings withdrawals until you fully appreciate the full cost of living. Your budget shows you don't know yet, and probably won't know until you leave home.

 

[FeeOnly.ca]

Leslie says: "the probability of becoming disabled are infinitesimal (unless you are in a risky profession, which most insurance companies won't insure anyways)."

Nonsense. The chances of actually suffering a loss of income as a result of a disability during your working career is quite high. The cost of that disablity could be in the millions if you are badly disabled early in your working career.

Number of Persons per 1,000 That will be disabled 90 Days or Longer Before Age 65

Age 30, 505/1000, 1 out of 2, Average Duration: 2.6 Years

Age 40, 446/1000, 4 out of 9, Average Duration: 2.4 Years

Age 50, 342/1000, 1 out of 3, Average Duration: 2.3 Years

http://www.compositefinance.com/whatinsurancedoineed.htm

You actually have one enormous asset - your Human Capital - your ability to earn an income over the next 30 years.

Principles of Risk Management

1—Insure Your Income

If your earned income is necessary to attain financial independence, then transfer the risk of loss of income resulting from long-term disability to an insurance company (if possible).


2—Insure Your Life

If loss of income through pre-mature death would pose a threat to your family’s financial security, transfer the risk to an insurance company, by buying life insurance (if possible).

 

[PMREdmonton]

I agree strongly about getting both life and disability insurance ASAP while you are healthy. You don't even need to buy much life insurance presently as you have no dependents but do lock it in now with the right to increase later without further medicals.

In terms of disability insurance, get high quality disability insurance ASAP now that you are earning a regular income stream. It is one of the best investments you can make to insure your long-term financial independence.

 

[leslie]

There are four rules for when to NOT buy insurance. One of them is "Don't buy insurance when you can cover the costs yourself." The statistics quoted above show only a short term average. Compare the cost of premiums over your entire working life against the cost of those 2.5 years less recovery from WCB and UIC disability coverage and car insurance.

The probabilities quoted include all the people with minor aches and pains we get over in a few months. Obviously a statistic for sales men but not a representation of your probability of financial impact.

And even the statistics themselves I find hard to believe. When you start your job, go see the payroll officer and ask "How many people have ever had to take a year off (or resign) because of disability since you got this job? What percentage would that be of all the employees?"

 

[PMREdmonton]

There are four rules for when to NOT buy insurance. One of them is "Don't buy insurance when you can cover the costs yourself." The statistics quoted above show only a short term average. Compare the cost of premiums over your entire working life against the cost of those 2.5 years less recovery from WCB and UIC disability coverage and car insurance.

The probabilities quoted include all the people with minor aches and pains we get over in a few months. Obviously a statistic for sales men but not a representation of your probability of financial impact.

And even the statistics themselves I find hard to believe. When you start your job, go see the payroll officer and ask "How many people have ever had to take a year off (or resign) because of disability since you got this job? What percentage would that be of all the employees?"

You could say the same thing about fire or flood insurance for a house. The individual risk is small but devastating if it happens to you so you buy insurance to offload that risk to the insurance company.

These decisions aren't really the equivalent of refusing an extended warranty on a television. We are talking about over a million dollars here for one's lifetime of wages.

 

[gracefully]

1) Start paying $500 rent to your parents. And also pay $150 for food. Forget the 'help out' bit. Of course they are going to refuse. But that does not mean they 'mean' it. And even if they do, you still need to pay up to learn to be an adult and take responsibility and keep self-respect. Use those arguments to force them to take your money. Or put the $$ directly into their account at the bank. You can most probably find out their account number at home.

2) Susy Orman (US media advisor who I greatly admire for giving the advise people need to hear, rather than want to hear) has the opinion that there is good debt and bad debt. She puts student loans into the good debt catagory, and says paying them off should not be a priority.

I disagree. Debt is a sword over your head. The world of possibilities opens up when it is removed. I say pay it down as fast as possible.

3) Forget the RRSP/TFSA savings until all debts have been paid off. And you either move out or start paying your parents market rents ($1,000 ?).

4) Talk to your pastor (or ...) about this, but I'm sure s/he will agree. Instead of making cash payments give them IOU script. AND fully intend to honour it as soon as your debts are paid off.

5) Your focus at the start is on the savings part of the equation, not the investing part. Read this argument.

6) You don't need any insurance because no one will be worse off financially if you die, and the probability of becoming disabled are infinitesimal (unless you are in a risky profession, which most insurance companies won't insure anyways).

7) You WILL want to buy 'things' like a car. Start the habit now and never break it, to save up BEFORE the purchase. Don't borrow just because everyone else does, or because your 'budget' promises you will have saved it by the end of the year. Do not set up automatic savings withdrawals until you fully appreciate the full cost of living. Your budget shows you don't know yet, and probably won't know until you leave home.

Thank you Leslie for the advice. I especially found #7) quite helpful as I wasn't even considering the full cost of living when I do move out.