Your next 10 years: My roaring twenties
University was easy. But learning about money? That was hard.
University was easy. But learning about money? That was hard.
My approach to building wealth in my 20s was simple. I didn’t. Like many twentysomethings, I lurched from financial crisis to financial crisis, all the while thinking how madcap it was to be 20 and broke. I’m 30 now and I’ve learned a lot in the past decade — how to make a soufflé, the benefits of regular exercise, which men to avoid. Most of all, though, I’ve learned about money.
First: what I did wrong. In undergrad at McGill I spent money like mad, ran out, and then panicked and called my mom. I lived in a fantasy world. I shopped in boutique stores, dyed my hair every month, had a fabulous apartment, and went out every other night.
I had no idea how much things cost — because my parents were footing the bill. I didn’t work at all through undergrad. When I needed cash, I phoned my mom, an arts administrator with the federal government, and my dad, a writer. They paid for the first two years of my education. Midway through university, they had to cut me off when they basically ran out of money. No matter. I just took out loans from OSAP, the Ontario government’s student loans program. I never thought about what it would take to pay off those loans.
I left Montreal in 2000, and moved back home to Toronto. Unfortunately, I forget to tell the OSAP folks. By the time I got around to contacting them, they had sent a dozen letters to my old, defunct Montreal address. I was six months behind in my payments, I had missed all the grace periods, and they had sent my loan to a collections agency. I can still recall trying to explain, tearfully, to a very nasty woman at the collections agency (where do they find those people?) what had happened and how sorry I was and could they be flexible with me.
Nope. They wanted me to pay, and they wanted me to pay a monthly amount that I could not afford. At the time, I was doing an internship at a city magazine and getting paid $500 a month. I was able to buy a subway pass, the occasional lunch, and that was about it. I wept, to no avail. They wouldn’t budge.
That’s when I started to get savvy. I realized that no one was going to help me out of my predicament. Really, why should they? I’d gotten myself into this trouble.
I stayed in touch with the folks at the collection agency and sent them little dribs and drabs of money whenever I could. Actually I called them a lot. I noticed that the more you stayed in touch, the more they chilled out.
A couple years later, I landed a well-paid job as a researcher at the CBC. I was living at home with no rent or bills to pay. I joined the credit union, showed them my pay stubs, and got a loan for just under $7,700, which was the amount I owed to the collections agency for my student loans. I paid the agency in full (boy, was I ever glad to see the back of them) and then had money deducted from every paycheque and funneled right back to the credit union. I paid off my loan in 10 months.
When I decided to go to grad school in the U.S. in 2005, I was a lot smarter than when I first went to university. I arranged scholarships and pled for a chunk of private money from rich benefactors. I also worked as a teaching aide, which paid for a big chunk of my tuition. I still emerged with hefty loans, but my debts were much smaller than if I had approached grad school the haphazard, deranged way I approached life in undergrad. I had finally gotten the message: borrowed money is real money, and it has to be paid back.
I learned the hard way the price of blundering through your 20s. Here are a few other things I wish I had known when I was 20.
Writing down your short- and long-term goals is a good way to get realistic fast. “Travel to see Sarah in August” is an example of a short-term goal. “Own a house by 35” is a long-term goal. Once you’ve identified your top two or three goals, you should write down a list of steps you can take to get to where you want to go. Say your goal is to be a book editor. Your steps might include: study English in undergrad, do internships every summer in publishing, get job as associate editor at a publishing house when you graduate. Your financial goals should be similarly detailed: get part-time job during school year, save 10% of what you earn, contribute to an RRSP, etc. Writing down your goals takes them out of the realm of the imaginary. And seeing them on paper forces you to think about how you’re going to get to where you want to be.
Once you’re out of school and earning money, collect receipts for everything that you buy for one month. At the end of the month, tally up your receipts and put everything into categories: $180 on groceries, $40 on coffees, and so on. Take a look at each category and be honest: can you cut back a bit? Not hugely, or you’ll feel pinched, but do you really need 600 text messages on your cell phone? How about 200? And do you need to go out for lunch every day? How about two days a week? Draw up a budget and stick to it. Suddenly you are in control of your financial destiny. And that’s the first step to financial freedom.
As I discovered, debt sticks around for a long time. Sure, if you’re slaving at a low-paid internship, you just might have to rely on old Visa now and then. But don’t go gonzo about it. Draw up a budget, use your credit card sparingly, and be scrupulous about making minimum payments. Missing payments show up on your credit report. Later on, when you need a loan for a car or house, you’ll either be denied the loan or have to pay outrageously high interest because you’re considered a lousy risk.
Ah, yes, the ever important credit rating. I had no idea what this was all about when I was 20, and I sure didn’t know how important it was. Your credit history is a measure of how good a borrower you are. It determines how much interest you pay when you buy a house, a car, etc. Too much debt is bad, but so, oddly enough, is too little. Alim Dhanji, a certified financial planner at Assante Financial Management in Vancouver, says he has seen thirtysomethings turned down for mortgages because they have no credit history. The rejected applicants are shocked, and for good reason: they’re not financially irresponsible people, they just don’t have credit cards, or any accounts in their name. To the bank, this means you have no credit history — so you’re a risk. The answer? Get one credit card, and always make at least your minimum payments.
Lots of women stand by their man throughout their 20s, let the man pay all the bills, keep all the accounts in his name — and then they split up. “I see women all the time who have no credit rating, are in their 30s, and can’t get a loan,” says Dhanji. “People in relationships should put bills in both names.” Even if you and your sweetie are deeply in love and you have forever tattoos on your bums, open an account in your own name (like a cell phone account) and pay the bills regularly. That way, if you and loverman ever part ways, you have your own credit history and a good credit rating that doesn’t depend on your ex.
See my story above. Talking to creditors helps. In fact, this is the first piece of advice I wish I had been given as a twentysomething. If I had gotten in touch with the OSAP administrators, they wouldn’t have freaked out and sent my account to a collection agency. Once I learned the importance of communication, my problems eased up. Even if I couldn’t make a payment, I would call up the agency and explain why I couldn’t pay. Creditors hate nothing more than silence. So stay in touch with them.
I always thought, oh, I can’t save, I’m not making enough money. Or, I’ll save when I’m older. But I was making money, even if it was peanuts: I worked at restaurants, I interned, I eventually had real grown-up jobs. I just shopped too much, ate out too much, went on way too many jaunts. I didn’t save a thing because I thought that saving little bits didn’t count. Well, the miracle of compound interest is something I wish I’d clued into. I figure that if I start saving $100 a month right now, and put my money into a portfolio of mutual funds that achieves an 8%-a-year return, by the time I turn 70 I’ll have about $338,000. If I had started exactly the same program when I was 20, I would have $748,000. More than double. Ouch.
“Student loans are an investment in yourself,” says Dhanji. If that’s the case, I’m a hot property. My fiasco should warn you: get a loan, but for the sake of your sanity, stay in touch with the people who loaned you the cash and don’t go into default. Dhanji says you should apply for federal or provincial loans to complete your studies before taking a loan from a bank.
Why? First off, you get tax credits for the interest you pay on government-backed student loans. Second, “if you graduate and you encounter financial hardship, you can apply for interest relief,” says Dhanji. “A bank is unlikely to negotiate with you on your loan terms.”
Finally, says Dhanji, don’t stress out about paying off student loans first. If you have more “pricey debt” (that is, debt with a higher interest rate) make that your top priority. Let’s say you owe $2,000 on your MasterCard at 18% interest, while your student loan clocks in at $10,000, but only charges 7% interest. You should pay off the high-interest credit card first, then tackle your student loans.
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