Start out right

Bruce Sellery says few things are as important to your financial well being than adopting smart money habits early on.

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Close-up of piggy bank in shopping trolley
Question

I am a 24-year-old recent graduate. I’m just starting my career as a sales rep for a large telecom company. From my net pay of $3,000 per month I am able to cover my living expenses, pay $100 towards my $300 credit card debt, $250 to get my $8,000 student loan out of the way early, as well as contribute $450 to an RRSP and $200 to a share accumulation program with a company match. I have heard that I will be able to use my RRSP contributions to help me buy my first home, but I’m still wondering where I should focus my efforts.

Answer

You’re only 24 years old? Wow. Your question is one that many people of your generation should be asking, but simply don’t. Though I can’t say I blame them. Not at 24 at least. At 25, then I can blame them for sure.

The two things you should consider as you allocate your hard earned money are 1) your goals and 2) rate of return. I gather that your goals include debt reduction and buying a home, and I’ll estimate the rate of return to give you a sense of what I mean.

Eliminate your credit card debt: The average credit card carries an interest rate of 19%. This rate is higher than what you’re likely to get when you put the money into your RRSP, so you should pay it off first. Besides, you are so close to wiping out your credit card debt entirely. So finish the job, and then promise yourself you’ll pay the balance off in full every month from here until the day you die. You likely won’t succeed every single time, but getting into this habit will save you a lot of money in interest expenses over your lifetime.

Pay only the minimum on your student debt: I admire your commitment to getting your student debt out of the way early. But based on what you’ve told me, I’d pay only the minimum because this debt probably carries of rate of only 5% and 6%. You’ll be able to get a better return with the company match on your share accumulation program, plus, you want to keep saving for your first house. Depending on what that minimum is, consider shifting what you can from the student loan repayment to share accumulation.

Maximize your share accumulation program: This is a perk that many people don’t fully appreciate. A share accumulation program with a company match can deliver a great rate of return. Let’s say you contribute $200 to the program and your company match is 20%. That means you get $40 worth of shares – which is a 20% return. These programs usually have a limit of how much you can contribute, say 5% of your pay. But get as close to that as you can to maximize the company match. The caution is that you need to watch your company’s stock price over time to ensure that it is still a good investment. For example, in the dot com bust, a lot of employees were over-concentrated in their company’s shares and the market decline hit them extra hard.

Contribute to your RRSP: You are correct that you’re able to borrow money from your RRSP through the Home Buyers’ Plan. Basically you are taking an interest free loan from yourself, which you then have 15 years to pay back. In the short term those RRSP contributions will help you defer tax, increasing your refund at tax time. Once the money is in your RRSP, be sure to invest it in something low-fee and low risk, given that you want to use the money long before you hair turns grey. Oh, and when that tax refund arrives, put it directly into your RRSP without passing go.

Open up a TFSA for your emergency fund: You are managing your money very closely, which is great. But it also might make sense for you to open up a TFSA and save some cash to cover emergencies.

Bust loose once in a while: One final thought. You deserve huge kudos for being mature about managing your financial future. But remember that you are still young; be sure to do a few immature things over the course of year just to stay alive.

ask@moneysense.ca

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