Your 20s is an exciting decade, full of big changes—and great opportunities to develop the foundation for a solid financial future. If you’re just finishing university or college, you’ll soon be entering the job market and seeing a regular paycheque for the first time. Or maybe you’ve already been working for a few years and are now starting to get serious about a savings goal. Either way, what you choose to do with your income at this stage of your life will have a considerable impact on your 30s. “If you can just stay on top of debt in your 20s you’re doing really well,” says Karin Mizgala, co-founder and CEO of Money Coaches Canada. “Of course, that’s easier said than done.” As you’re probably discovering, the cost of living is expensive and you may have student loans hanging over your head. But with a little bit of discipline and some smart planning you’ll find out that, financially speaking, time is on your side—provided you make the right choices now.
Spend less than you earn
As simple as this advice may sound, it’s the absolute bedrock of sound financial planning. “People in their 20s have their whole lives ahead of them and the idea of saving for retirement is so far away that it’s not even on their radar. If you haven’t quite worked out your goals, that’s fine. But you’ve still got to try to live within your means,” says Calgary-based money coach Tom Feigs. “Don’t start running up consumer debt. Never get used to credit. Try to view it as borrowing from your future.”
To avoid falling into bad habits, create a budget for yourself. “Build awareness of what it costs to live,” advises Mizgala, “and learn to pay attention to what’s going in and out of your bank account.” Resisting all of life’s temptations and balancing out your wants (is that new HDTV really necessary?) from your needs (the rent won’t pay itself) will be key to your success.
Also realize that you’re going to have some lump-sum expenses throughout the year, adds Feigs. For instance, if you know you’re planning to go vacationing this fall or winter, start saving up well in advance so that you’ll have the cash on hand when you need it and won’t be tempted to rack up a big credit card bill. “Always ask where the money is coming from,” says Feigs. Provided you’re not increasing your debt load right now, it doesn’t even matter if you’re not actively saving. After all, you’re in the early stages of your career. The bigger pay cheques will come later on.
Protect your ability to work
Young people often feel invincible but that still doesn’t prevent them from getting sick or injured and not being able to work for long stretches of time. “You need to think about disability insurance. That should be one of your top priorities,” says Dan Hallett, director of asset management for HighView Financial Group. In his own practice, Hallett recalls doing a broad financial plan for a young couple who scoffed at his suggestion of paying for disability insurance. “Then they had a car accident and were in recovery for a year.” While most people in their 20s don’t have a lot of disposable income, he says, at the very least they should check to see if their workplace provides disability coverage.
Avoid the debt trap
Of all the financial challenges you’ll meet in your 20s, this is one you’ve got to stay on top of. Your No. 1 goal should be to leave this decade with little or no debt. Trust us, your future 30-year-old self will thank you later on when you find yourself trying to contend with the more weighty challenges of buying a house or raising a family.
So if you do find yourself currently carrying some debt, tackle it logically. That means prioritizing high-interest-rate debt first, like credit card balances. Always be sure to pay off your balance every month, and if you can’t do that, cut up your credit card and throw it in the trash.
Next, zero in on any student loans you may have left, and try to pay them off as quickly as possible—ideally within no more than five years, says Mizgala. “Some might argue that interest rates are low so it might be better to invest and pay over a longer time period, but it’s better to start your 30s with a clean, debt-free slate.”
Making savings automatic
If you’ve read this far and feel confident that you’re successfully meeting all the challenges we’ve laid out above, now’s the time to start thinking about putting away some money for the future. Whether your goal is short-term or long-term, don’t underestimate the magical benefits of compounding. “Time is such a valuable asset financially,” says Hallett. “At a young age the rate of savings really trumps everything else at that level. The longer you’re invested and the more money that you have invested, the more that you’ll benefit.”
To make saving even easier, says Mizgala, make it automatic by having a portion of your paycheque directly deposited into a TFSA, where it will be out of sight and out of mind. Even if you’re only able to set aside $100 a month, or even just $50, you’ll be surprised how quickly it can add up. Perhaps more importantly, says Hallett, “if you can see how a small amount will add up over five to seven years, that will help to provide a financial motivation to keep the habit going and increase your savings as your income starts increasing.”
Learning how investing works and understanding how financial products differ will go a long way toward helping you know how comfortable you are with risk and how fees impact returns. Great starting points are reading books like The Wealthy Barber by David Chilton or The MoneySense Beginner’s Guide to Personal Finance.
Even though you may not have much or any disposable income to work with right now, becoming financially aware will pave the way for greater success and fewer mistakes down the road. When you’re in your 30s you’ll be earning more money but you’ll also be under much more financial pressure—meaning it’s all the better to learn what you need to know now, rather than later.
Lessons I Learned In My 20s
Hannah and Kirk MacTavish aren’t worried about buying in Toronto’s heated housing market. Sure, the late 20-something couple would gladly welcome more living space for their precocious toddler Lincoln and do look forward to eventually owning a home, but for now they’re happy to keep on renting an apartment. Why? “We’re really disciplined with our investing,” says Hannah, explaining they treat all of their disposable income as if it were earmarked for a mortgage. But instead of paying off a home, they put all of that income into their registered accounts—and an RESP for little “Linc.”
That’s the biggest lesson the couple has taken from their 20s so far—that owning a home doesn’t have to be the foundation of your financial plan. While purchasing a house forces you to be more stringent with spending, Hannah, who works as a registered dietician, says she and Kirk have learned to do that themselves—but without the additional costs of buying a home and maintaining it. “You have to be diligent every month and say, ‘Okay, this is the money that I would be putting into a house,’” she says.
Best of all, this plan gives them flexibility. Kirk is completing his PhD at the University of Toronto Autonomous Space Robotics Lab, and they may stay in Toronto or later relocate to pursue job options. “If we were buying in Toronto right now we’d only be able to afford a really crappy place,” says Hannah. “Somewhere we wouldn’t necessarily want to live and it would probably be a fixer-upper.”