[kevinlk]

Hi,

I've chosen to write this topic in order to have an idea about what you would do in my situation. I've read most of the MDJ blog, as well as several other websites, but the more I read about it, the less confidence I have to actually do something. With the current economic crisis, this could easily turn into one-of-a-lifetime opportunity, and staying on the sidelines isn't a valid option.

Here is my background:

I recently turned 22 and am working in downtown Montreal at a job paying me 33k/year. I currently live in a 4 and a half appartment at 630/month and I'm renting a room in it. I'm single and don't have any kids.

Here are my assets: 36000$ in cash rotting in bank accounts, a car worth about 3000$ now. I don't have any RRSP, no TSFA ( Yeah, I really need to get one! ). I just started out a non-registered account at work, a stock offering at 2% matched by the company, which I took. The company doesn't pay dividends and the growth seems limited. In any case, that account has virtually nothing at the moment.

My liabilities are a student loan of 16000$ currently at 3.3% ( not locked ).

My budget averages out on the course of the year at around 400$/month free. It may be higher as I don't take into account tax returns, etc.

My goals in life : I don't have any particular goal at the moment. I would like to retire early, although I don't expect to have any expensive hobby during the course of my life ( although that may change, but knowing myself, it's unlikely ). I currently don't want kids until I'm maybe 27, and by then, I'll see if I want any or not.

I've looked to buy real estate in Montreal ( a condo where I could rent a room, a duplex or whatever ), but by the time I started looking them ( around the same time last year ), prices don't seem to have went down at all. I'm not the handy type of person also. I've looked into Reits, but with the real estate crash ( and from what I've read, the crash is likely not at the bottom yet ), I'm more or less afraid to see Reits with interesting yields ( 5+% ) go bottom-up.

I've looked into dividend stocks, mainly banks. But, with the RE and credit crisis worsening, is it safe to invest in them? I'm not afraid of them going bankrupt, but more like seeing them reduce dividends greatly, bringing the stock prices way down.

I've looked quickly bonds, but they're not really interesting due to very low yields. With the upcoming inflation that is likely coming, RRBs could be an option, but I would need to read more about them.

I've also looked in starting my own business over the Internet ( I have tons of free time at work (2-3 hours a day), but I haven't found anything that could work, most ideas I've had being already realized, and free to the general public.

That's pretty much a good summary of my situation right now. Knowing this, what would you do if you were me?

If you have questions, feel free to ask them, I'll try to answer them quickly enough.

P.S. FT, if you want to use this post for your blog as part of the reader's mail, feel free to do so. I enjoy reading the discussions there .

 

[Cal]

I would go talk to your bank financial advisor, and at least 2 independant FA's, just to get a better idea of where they think you are at.

I wouldn't commit to working with any of them. Just get a better idea of their recommendations, and digest that for a bit of time, before you make your own informed decision.

 

[el oro]

You sound a bit like me not too long ago so I'll tell you what I did and am doing.

I started out renting as well. Then a friend of mine asked me to buy a large house with them and split it 50/50. Now I've got a large house with a few rooms rented out and the rental income > mortgage payments by a few hundred or so per month. (I wouldn't have bought without rental income).

Imo, hyperinflation will solve the credit crisis. So, I've maxed out my TFSA, RRSP, and put the rest into an unregistered account and invested with inflation in mind. All accounts are self-directed.

I hope to have my own business one day as well. Right now I'm just keeping my eyes open for opportunities. I really hope I'm not working for someone else 10 years from now.

If you're not going to move your money, paying off your debts is better than leaving it in the bank. But I assume you want to.

And ditto what rookie said.

 

[kevinlk]

I've thought about buying real estate with someone and rent it with someone. However, from what I've seen in Montreal, on a number of websites I've visited, real estate is still pretty expensive in Montreal : ( rent barely paying out mortgage, taxes, maintenance, etc ). Another problem is finding someone with who to buy something. Either they don't have enough money, they're not willing to commit themselves to living to a place, or don't want to rent rooms to others. I guess that's where a spouse could come in handy .

I often look for new houses/condos on sale in case I see a bargain well located, but nothing satisfying so far.



About consulting a FA, I've been thinking about doing it, but I thought I would post here first, as I kind of know already a few people here ( Never posted, but I've read the forum/blogs a lot, so dealing with people that I've seen their opinions on various topics is more reassuring than seeing a FA ( especially the bank one ) who is more willing to sell you mutual funds than anything else. I think an independant FA would be the way to go for me.

 

[ashby corner]

in all seroiusness, I think I'd pay off the student loan 100%. Then you're debt free.

Do like 1600 gold guy did, and "chip in" on a house. Even with a few friends. You have to live somewhere.

 

[kevinlk]

The 16k debt is at 3.3% at the moment. I'm pretty sure that 16k can be put to better use ( of course, not rotting in the bank ) and provide a higher return than that. Any mortgage would have a higher rate than the one of my student loan, so it could be considered "good debt".

 

[gwcanuck]

You didn't mention how much available RRSP room you have.

Here's what I'd do:
1 - top up RRSP with your $36k cash.
2 - take the tax refund plus whatever other cash it takes and pay off the student loan.
3 - take $5k and open your TFSA.
4 - continue with your employer's plan, their matching money is a 2% bonus. If they have a payroll RRSP plan and you like the fund choices, setup regular RRSP deductions there. Otherwise setup with your bank or a planner.
5 - setup automatic deductions so that you're setting aside 15% of your gross pay. Put the money into equity/bond+cash using 110-age as the % going to equity. In your case that would be around 90% equity.

Keep an eye on the value of your employer's stock. If it exceeds 10% of your assets, sell some.

Follow the advice from others and interview a few planners. Pick one and use them.

Won't be long and your net worth will take off. You are asking the right questions and seem like a financially astute 22 year old. Good luck.

 

[Taxsaver]

in all seroiusness, I think I'd pay off the student loan 100%. Then you're debt free.

Do like 1600 gold guy did, and "chip in" on a house. Even with a few friends. You have to live somewhere.

I love the "Chip in" idea for a house! Thanks. I've already started talking about it to various people. As you save up money, you may buy one of the co-owner's part in the house. Eventually, the whole house may be yours.

But what happens when one can no longer pay for his part of the mortgage???

 

[steve41]

I've seen a lot of financial plans. Individuals almost always start planning/saving later in their working life. The reasons are...

Early on you are involved in acquiring a home and mortgage and busy paying down student debt. Finally, when you run a financial plan, few people take note of the fact that salaries don't rise with inflation, they increase at a much higher rate (career advancement) You will have much more discretionary cash in your later career.

My advice is to not sweat the fact that in your mid-30s you still have not accumulated much of a nest egg. You will be making it up in the latter part of you career.

Just my two cents.

 

[stephenheath]

Mostly I agree with gwcanucks post except for three things.

1) I personally would put the $5k into your TFSA first, which is entirely an opinion thing, but my reasoning is (a) that at retirement, I'd rather draw from a TFSA than a RRIF, and (b) until then, it's accessible for anything like buying a house or having as an emergency fund.

2) I realize it's not likely that you have 36k of contribution room, since 33k/year gives you 6k/year of RRSP room, so you'd have to have been making that much since you were 16. That said, you don't want to put more in in a single year than you get tax breaks from. Let's say at $12k income you pay no taxes... then the most you would want to put in a single year would be $21k, with the remainder going in the next year. Other than that little technicality, I agree with gwcanuck on maxxing out the RRSP.

3) Again, this point is purely opinion, but I personally wouldn't even keep 10% of your portfolio in your company's assets if you can sell the stock (ie, no vesting rules). Sure, the match (which I'm assuming you mean is 100% match up to 2% of your salary, not a 2% match of your purchases, which would be useless considering the risk vs. reward) is nice, but I've had two close friends build up good chunks of company stock... and those paid dividends and/or grew a bit... only to have the company go bankrupt and in both cases, they lost their nest egg AND their salary at the same time, which is a brutal double-hit. In this case, you aren't even getting dividends or growth potential, so why hold the stocks? Get the match and cash out.

 

[MoneyGal]

SH: you can put as much into your RRSP as you have contribution room (plus a $2000 overcontribution).

This is different from taking the deduction.

Generally speaking, if you have the room and the funds, put the contribution in - and then take only the deduction which is most tax-efficient (i.e., brings you down one tax bracket).

 

[MoneyGal]

And I totally (TOTALLY) agree with the recommendation to get the company stock and cash it out immediately.

For me, it's all about hedging personal risk. You already have a lot of exposure to that company (through your salary) - instead of taking on *more* exposure, look for a negatively-correlated asset (or that's what I would do).

(Note Rickson: I did not say "diversify".)

Sometimes I think people get taken aback when the company's share price drops AND they lose their jobs. Hey - those things are actually correlated.

 

[Cal]

You might want to check out www.greaterfool.ca for the pessimists side of Real Estate prices. You seem to have the same opinion.

If you want the optimists opinion of RE just call a local RE agent. They will always give you lots of reasons to buy a house.

 

[kevinlk]

Thanks everyone for the help!

I'll have to verify if I can take the company stocks out right away
with no penalties. Doesn't make much sense to keep that company stock, especially since it's a low growth with no dividends. Keeps the risk away from company trouble hitting both salary/stocks.

As for RRSP room contribution, I've started this job one year and a half ago, and had several low-paying jobs before. I think I would have around 15k contribution room that I should fill out. I would have to fill out 5k to the TFSA and invest the rest in non-registered portfolio with investments less taxed than what would be in the registered portfolios ( if I remember correctly from my reading on MDJ, that would be dividends stocks ).

As for investing, what would you suggest? As a broker, I've seen Questrade on MDJ, but there's been so many complaints about them that I don't think they're a valid option for worry-free investing. If I could avoid the big banks with their 29$/trade fees, that would be good too. I've seen a few other brokers, like Scotia E-trade, Credential Direct, Qtrade and TradeFreedom that both offer RRSP and TFSA and has no maintenance fees for less than an 100k account. I've seen the reviews, but I'm still kind of undecided. Knowing the amount I have to invest and that I'm not looking into heavy trading, would you have any preference ( by personnal preference, or other ) in a particular broker?

As for the stocks, with the money I have, as well as the company knowledge I have ( which is limited ), I'm assuming I'm better off to buy an ETF than actual stocks, in order to diversify and minimize risks. Any suggestion for low risk/mid reward etfs? I'm definately not looking for a grand slam, and the investment will probably be there until I find a good opportunity in the real estate market and/or people willing to invest in a shared propriety, which may or may not take a while.

Again, thanks everyone for the help .

 

[kevinlk]

You might want to check out www.greaterfool.ca for the pessimists side of Real Estate prices. You seem to have the same opinion.

If you want the optimists opinion of RE just call a local RE agent. They will always give you lots of reasons to buy a house.

Thanks for the link, I haven't seen that site before.

Yeah, I'm not really optimistic with RE, I more or less think there will be more delinquancies because of the higher % of the jobless population, and it keeps going up. People who buys now are using very low interest rates, but with the most likely future inflation, are those who didn't lock their interest rate able to afford the payments, which would then make even more delinquancies. Ultimately, with the baby-boomers more or less soon retiring, they'll either go in retirement houses, live elsewhere ( Florida mobile homes are dirt cheap, as seen from another thread here ), or ultimately die, leaving a lot more houses on the market. That's what I think will happen in mid-term ( 10-20 years ). But meh, I'm no expert, that's just my opinion .

 

[FrugalTrader]

Kevin,

Congrats on the big savings. Now it's time to put it to work! If it were me, I would take some cash and pay off the student debt. I'm hesitant to suggest the RRSP as you are in the lowest tax bracket in Quebec. However, if you expect higher income in the future, you could deposit the money in an RRSP account and claim the tax deduction later during a higher income year.

As well, since you plan to purchasing real estate in the future, you can take advantage of the RRSP Home buyers plan.

If you plan to invest, then opening a TFSA will make the most sense as your gains will be tax sheltered. If you want to invest for the long term, you may want to look at some indexing strategies with ETF's.

Hope this helps!

 

[Dave]

However, if you expect higher income in the future, you could deposit the money in an RRSP account and claim the tax deduction later during a higher income year.

I know that it will sound like a stupid question, but how can you use a deduction later ? For eg, if you make a 10K RRSP contribution, the broker sends you one tax receipt for 10K. So if you claim only 5K, will they believe you later that you are claiming the reminder of an unused deduction ?

Dave (also no RRSP)

 

[MoneyGal]

CRA knows that you made the contribution, but they don't require you to take the tax deduction in any given year.

You complete a Schedule 7 to record the contribution and carry it forward to a future year.

 

[FrugalTrader]

CRA knows that you made the contribution, but they don't require you to take the tax deduction in any given year.

You complete a Schedule 7 to record the contribution and carry it forward to a future year.

+1 Thanks for the detailed explanation MoneyGal.

 

[stephenheath]

MoneyGal: Good catch, thanks, I had forgotten all about the opportunity to do that! The main thing I was thinking of was not taking the deduction when you are already at zero taxes... the tax man won't be nice and point out you're losing out

And Kevin, personally I use Qtrade, although I've only used it for stocks, not mutual funds, bonds or GIC's yet. It actually does have a yearly fee if your RRSP is less than $15k, but there is no fee for the TFSA or your regular accounts. It's not $29 per trade like the banks, but it's not as cheap as questrade either... it's $19 per trade until you have over $100,000 in assets, and then it drops to $9.99 like the others. That said, if you aren't going to do too many trades I'd still think about using them because their customer service is EXCELLENT and they are very patient with newbie questions. I've never called without someone answering the phone and being able to help me (no lousy nested voicemail menus), and email questions are answered fairly promptly (generally within the hour). Since I only do 5-6 trades per year at the moment, I consider that $50 a cheap price for great service, and in a few years I'll be over the $100k mark and get the low prices anyway. (Well, if my stocks would ever stop dropping in value I will be ).