Accounting for reality

Prosperous investments begin with sensible saving and financial wakefulness

Cultivating financial literacy and mastering the basics of budgeting while still in university, provides the perfect foundation for successful investing down the road.
Cultivating financial literacy and mastering the basics of budgeting while still in university, provides the perfect foundation for successful investing down the road.
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Today’s university students are relentlessly warned of the volatile economy and hopeless job market that awaits them after graduation.

The answer to a brighter future, however, may simply lie in a commitment to the fundamentals of personal financial management.

Though it may seem eager, graduates just beginning their careers should start thinking about retirement, according to Robert Walker, a consultant with Investors Group Financial Services.

Initiating contributions to a Registered Retirement Savings Plan (RRSP) is an excellent starting point.

“The usual scenario in my business is to see a client who wants to start investing and they’re in their 50s,” Walker said. “They’ve never taken saving for future retirement or RRSPs seriously, until it’s staring them in their face, and then it’s panic time. That’s the reality — most people don’t pay attention.”

Investing in an RRSP serves up two major advantages, according to Walker. First, the invested capital grows tax-free. Furthermore, individuals who invest in RRSPs are rebated for such contributions upon filing tax returns.

Students in particular can also benefit from RRSPs in the short-term.

“The RRSP, which in theory is money locked in for your retirement, actually has an exemption for people who take money out to go to school,” he said.

University students are most often subject to substantial expenses and limited incomes. As a result, it’s often very difficult for those still in university to accumulate savings. It would be mythical, however, to deem it impossible.

“A big mistake people make is when they receive a chunk of money, whether it be from OSAP, their parents, or a bank … [they leave] it sitting in a bank savings account, which will probably give you something around a .05 per cent interest rate – essentially nothing,” Walker said.

If you’re not ready to invest for retirement yet, another desirable option is a tax-free savings account — an invention of the Canadian government that materialized in 2009.

According to Walker, the federal government introduced these accounts as a means of deterring Canadians from withdrawing from their RRSPs to cover daily expenses — a measure many individuals resorted to after being avalanched into economic hardship during the most recent recession.

“If you put it into a tax-free savings account, you can actually invest the money so that it’s growing over time,” Walker said. “That way the money you’ve got that you’re relying on is actually growing and not eroding over time because of inflation.”

“If you’re in university with a part-time job, I would suggest taking part of that income — a minimum of 10 per cent, up to whatever you can afford — to set aside.”

While one may invest an annual maximum of $5,500, there are no penalties for withdrawing from such accounts, providing an accessible safe haven for one’s savings.

Despite these options, Walker spoke of an epidemic of financial obliviousness that continues to hinder most individuals in the management of their personal finances, as well as prevent many people from investing profitably.

“One of the biggest mistakes people make is not actually knowing what’s going on,” he said.

“The first thing is that people should actually know what their expenses and incomes are — most people have an idea vaguely, in the back of their mind, but they never really take the time to actually document what’s going in and out,” Walker said.

In addition to maintaining financial awareness, one must also commit to financial prioritization.

Nearly 30 per cent of Queen’s students finance at least a portion of their educations with government assistance, graduating with the burden of debt repayment. Upon graduating from university, eradicating student debt as soon as possible should be one’s utmost financial priority, according to Walker.

“Whether it’s OSAP, university grants, or outside loans, the thing to think about there is that the cost of those loans — the interest rate — is probably a lot higher than what you can generate by investing your money right now,” he said.

When asked about the average time frame for eliminating student debt, Walker responded “way too long.” While it may be frustrating to delay allotting one’s income in niches with optimal return on investment, the truism holds: good things come to those who wait.

The sooner a young person tackles his or her student debts, the sooner one is able to grow investments and ensure financial prosperity for the years ahead.

Furthermore, educating oneself on the state of the economy and financial markets is an integral component of inviting financial prosperity into one’s life.

“Financial literacy is an important life skill, and one that you should take every opportunity to improve,” wrote Liz Rocchi, recent graduate of McGill University, in a guide to personal finance drafted for students entering their inaugural year of undergraduate studies.

According to Rocchi, there are several distinct advantages to budgeting, including a consistent awareness of one’s financial circumstances.

“[Budgeting] allows you to identify ways of improving your net savings, by earning more or spending less,” wrote Rocchi.

According to Theresa Alm, associate university registrar of student awards at Queen’s, many people are daunted by budgets, viewing them as a means of punishment, when in reality, budgets are intended for the sole purpose of informing financial decision making.

“The thing is a budget is not intended to be static. It can be a living document, so as something comes up then you can go make an adjustment to the budget,” Alm said.

“I think sometimes one of the challenges for students is living within their own means. They have to remember they have to work on their budget,” Alm said. “Sometimes there’s peer pressure of wanting to keep up with their friends or even wanting the same lifestyle as their parents.”

Alm touched on the importance of making one’s budget as realistic as possible.

“We encourage students to put everything in their budget,” Alm said. “See where you are and see what you have for your discretionary fund. You have to pay rent, you have to pay utilities, you have to pay your tuition and fees, and your books and supplies, and then know what your discretionary amount is and be careful within that amount.”

“Maybe you can make some other choices in the summer when you’re working,” she said. “That latte everyday when you’re working may be okay, but that latte everyday when you’re a student is not quite okay because if you take a moment and think about those expenses, they can be quite costly.”

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The Investment Ladder

Financial consultant Robert Walker recommends basic mutual funds as an excellent introduction to diverse investment.

“There are hundreds of different kinds, but it’s a good starting-off point.” he said. “You don’t need a lot of money to get going — you can start building with contributions of $10 or $20 a week.”

“As a first step, make sure they’re inside your RRSP or tax-free savings account, because you get a tax benefit out of it.”

The next step up the investment ladder, according to Walker, is non-registered accounts, with either banks or independent fund companies. Climb further up the ladder and one arrives at individual stocks.

“That entails [a] higher level of risk. It may also involve more money,” Walker said.

Walker advises that investing in individual stocks requires considerable more knowledge of the economy, which is why those more devoted to this mode of investment often rely on a stockbroker, whose extensive knowledge of the financial markets is essential to deriving profit.

Brokers, however, have less incentive to assist individuals, as opposed to larger entities with sizable investments, inevitably making individual stocks an elite arena in which to invest.

“If it’s just you investing, a broker’s not going to really pay much attention to you,” Walker said.

According to Walker, it’s absolutely advisable to maintain a maximally diverse investment portfolio, especially in a volatile economy.

“You never put all your eggs in one basket — have a bunch of different baskets.”

Dividing your money among numerous unrelated investments that are unlikely to fluctuate symbiotically is the basic idea.

Still, Walker emphasizes the primary advantage to being a young person immersed in the realm of investments: one can afford to take risks.

“My theory is when you’re young, you can make mistakes, and screw up a little, because you have time to recover,” Walker said. “When you’re 60 and you make a financial boo-boo, you don’t have time to recover.”

Save more by spending less

1. Avoid spending money on interest. Make every effort to pay every bill on time, and avoid paying interest on outstanding balances on credit cards and other bills.

2. Delineate necessities and luxuries. It may be difficult, but determine the vices you can live without, and perhaps the ones you can’t. Cutting down on things like coffees, meals out, take-out, magazines, manicures and other treats can usher one’s budget to equilibrium quicker than many realize.

3. Frugal fun: Evaluate whether or not your social life is becoming a financial burden. Hanging out with friends should be fun and enjoyable, as opposed to financially exhausting. Take a look at ways to curb frivolities, whether that means spending less on drinks at the bar or being a little choosier with the number of concerts you attend.

4. Look at how much you’re spending on getting from point A to B. Consider ways to mitigate your transportation costs; for instance, switching from driving to taking public transportation, cycling or walking.

5. Evaluate whether or not your living accommodations are appropriate for someone on a student budget. While there’s no need to sacrifice a comfortable living space, you shouldn’t be breaking the bank on rent either.

6. Sharing is caring. Living with roommates is advantageous, not only in regard to dispersing the cost of rent, but in permitting the dispersal of other living expenses, including utilities, household supplies and even food and transportation costs. Alternatively, living at home is an opportunity for vast savings during one’s time in university.

7. Zone in on your utility bills and decipher where you may be able to accumulate savings. For example, is cable television a necessary component in your life? Could you save on internet expenses with a different package from your service provider? Is it necessary to keep a telephone landline?

8. Go green. Striving to conserve electricity and water usage will benefit both the environment and your pocketbook. Those are savings you can feel doubly good about.

9. Take advantage of student pricing, as there are countless student discounts available. Investigate where and when it’s wisest to shop as a student. For example, do grocery stores or restaurants offer student discounts on specific days? Do certain stores host sales specifically geared towards university students?

10. Figure out where you are willing to make sacrifices. For example, are you willing to travel home less frequently or buy less expensive clothing? Could you survive without a data plan for your cell phone? Prioritize the savings that make the most sense to you.

Emily Miller; Source: Elizabeth Rocchi

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