A letter to my children on what I see wrong in the world with finances and debt and how I hope to teach them to do better.
I realize now I was lucky. Grandma and Grandpa taught me a lot about finances without really realizing it. They taught me how to save and how to never spend more than you can afford. Grandpa hated any kind of debt (still does!). That rubbed off on me in a big way. Now I see and chat with a variety of people who weren’t as lucky and are learning finances the hard way. Canada’s debt load is increasing and its personal debt, not business debt, which is much different.
I have been interested in business and investing for a long time. I remember starting to read books on it (“Think and Grow Rich”, “Rich Dad Poor Dad” and “Smart Women Finish Rich” were some of the first ones) when I was in my early 20’s. My friends/peers influenced me a lot in this area. In business school and with my different clubs I was involved in, they were consuming these books, so I did too. So, my first tip is that friends can influence you in good ways as well as bad. It is always good to look around and make sure the people around you, are influencing you in the right way. Pushing you to learn, not holding you back.
Let’s get back to finances, I have been thinking about it and really, I hope to teach you in many ways what Grandma and Grandpa taught me. Maybe with a few extra things I have learned along the way.
Do not put anything on a credit card you cannot pay off by the time the credit card is due. The minimum payment is a small fraction of the balance you owe, and the interest is astronomical. You will only get yourself further and further behind. Then if you decide to get into a relationship you are further bringing your future spouse/partner into your debt which can be hard on a relationship. I would add that you should also make sure you discuss these types of things with serious partners before the big day (mov-in or marriage). You should make sure you know where they are at before deciding to take it on. Yes – it may be personal debt but paying it off can still take a major impact on family cash flows. It is a necessary discussion.
“Do not buy something you can’t afford.”
A big part of those early books had a similar theme of automating your finances. There are two ways I always recommend looking at automating – short term savings and long-term investing. When I think of savings, I think of saving for a trip to Disneyworld, which we were able to do last year. My recent saving’s project was saving to get my eyes fixed. The date is now booked. That one was on my list for 10 years. Your saving projects will be different. They will be you. When you save and pay for something big, you want to feel like you earned it and you will. You will even enjoy it that much more for having earned it.
When people ask me how much I should save, I always say it depends. I am not a financial planner so won’t get into the percentages and calculations. Besides, that is different for everyone. Everyone has a different bucket list and a different set of circumstances (that isn’t meant as a opportunity for cop out). When you make your list of bucket list items to save for, you can further divide these into buckets to “For me” or “For the Family”. Make sure you contribute to each of those buckets. You’re worth it!
The old way to do this was using change and having actual jars. Well a lot of people don’t use cash now. So that isn’t going to work today. Instead automate it by setting up an automatic withdrawal from your personal account to a savings account. For these types of short-term savings, I usually recommend a TFSA (Tax Free Savings Account) but it depends on how long you will have to save for. A regular savings account may work too if it is for less than a year.
Figure out what you want (you will have to pick which ones mean more to you) and how much it will cost. I generally only recommend one or two goals at a time or it can get confusing and delay when you will be able to afford it. You also need to be realistic and include your loved ones in the discussion. You may find you want a new family car but your loved one would rather have a family trip. Identify these
“Save for What You Want Today but Can’t Afford”
Investing in Your Future
This can mean different things at different times. I am not saying you should feel guilty about not making saving for retirement when you are going to school. I have friends who took on a lot of student debt in University. They thought they could easily pay it off when they graduated. Now they are struggling with student debt loads. It affects their life and family in big way. You will be lucky and get some help. We are prioritizing having some savings for you using a Registered Educational Savings Plan. It won’t pay for everything. If you do need to get debt to pay for school, don’t be careless with it, you will regret it later. If you are using debt to pay your way, your box of what you can afford today is empty. Remember that.
So let’s get past school. All I recommend is that you start saving for retirement early. Don’t start the “after I get a job making $XXX, I will start” or “after I buy a house” …the list goes on. Maybe your job after graduation isn’t making the dream money you had thought. That is okay, start small, but start doing it as soon as possible and automate it. The advantage in Canada, of Registered Retirement Savings Plans (RRSP) is that you can use them later for house purchases Home Buyers Plan (https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan.html) or to go back to school using the Life-Long Learning Plan https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/lifelong-learning-plan.html). I have also seen many people use them in emergencies (lost job etc).
Registered Retirement Savings Plans are your long-term tool for investment. It is very boring to save for retirement and seems so far off. You do not want to get there and then be forced to continue working as your friends retire. I am entering an age where in my peer group our parents are aging and we tend to chat about it. I met a woman that was in her 30’s at an event in the Okanagan who I ended up in deep discussion with. Her mother had suddenly (and much too young) passed away. It was only after she passed that they found out she had an extensive amount of credit card debt. The women then had to help her dad deal with it and plan on how they could pay it off (he unfortunately will not be retiring soon).
The amount for the future also depends. You should chat with a financial planner as they get into details on your expenses etc to help you determine what you will need in retirement. Most will provide you with a free general calculation. Generally, I see the recommendations around 15-20% of income. If you are in your early 20s and making 30,000 per year that may be tough. The important thing is to start and try to increase it as you go. Even 5% in your early 20’s can make a big impact later.
If there is one take away, it is to make sure you invest in your future. Automate it and make sure you re-visit it and adjust the payments. You and your future family are worth it.
“Invest in your future. You are worth it.”