Whether you are a professor, plumber, student, or mother, you can save and invest! While it seems like a simple idea, it is surprising how many individuals ignore their finances. In fact, 32% of adults say they have no savings at all. Teenagers and young-adults have even less experience with saving money, even though saving is best started as soon as possible. For example, if you were a teenager saving for school in 1986 and invested $100 in Microsoft instead of buying the first version of Windows, it would be worth around $45,000 today. It’s safe to say that understanding the different ways to save earlier will provide you with some real long-term benefits.
The best reason to start investing as early as you can is the power of compound returns. The power of compounding can help your investment (as small as it may be) grow exponentially. This means that the returns you make will be reinvested year after year, allowing for larger returns than you would have achieved with comparable simple interest. For example, saving just $100 per month, from ages 22 to 67, equates to approximately $379,000 provided you earn 7% growth per year. Waiting until you’re 32 years old to get started will cause that number to drop to $180,000. As you can see, waiting 10 years will result in a loss of about 64% of your retirement savings, all else being equal.
While there are many simple ways to earn returns on your money at a young age, it requires you to save money first. The best way to save money while you are a student is to get a part-time job and save as much of your pay cheque as you can. A good mark is to put 10% of every paycheck into your savings. Also, you can earn a considerable amount of money with side-jobs such as online ventures, mowing lawns, and tutoring. To highlight the value of cutting expenses, for every $100 per month you can trim, you will save $1,200 more per year. That $1,200 can be put in your TFSA for safe (tax-free) keeping!
Another helpful way to save money is to use a budget for your daily activities. There are plenty of helpful tools online such as apps and free spreadsheets that help you save your money. Some examples of these budgeting apps include Mint and Fudget. These apps allow you to link all of your bank accounts, view your credit score at any time, and help you budget your finances. Also, there are apps such as Mylo that round all of your payments to the nearest dollar and invests the difference for you. Simple aids like this make your journey of saving a lot less daunting!
Open a TFSA!
Confused about your Tax-Free Savings Account (TFSA)? Your not alone!
Despite being the single best tool for saving in your last year of highschool and beyond, TFSA’s are relatively unknown and underutilized. A TFSA is available to any Canadian aged 18+, and is a tax-free way to save money towards a goal (example: post secondary!). Even though it’s called a savings account, you can hold any sort of investment in it, including cash, stocks, bonds, or Exchange-Traded Funds (ETF’s). Starting when your 18, you can contribute an increasing amount each year, for an indefinite amount of time. Yes, that means forever! You cannot lose contribution room (amount you can hold in your TFSA) which means that if you were 18 when they were introduced in 2009, you would be able to contribute $57,500 today. TFSA’s were introduced in 2009, but only one in five TFSA holders have maxed out their contribution limit.
Further, you can take out money for any reason without losing that “room” in your contribution limit. But be warned, if you over-contribute, you’ll have to pay a 1% penalty on your excess amount per month until it is removed! To show the power of tax-free savings, consider the effect of tax on a $10,000 investment with 4% annual return, compared to the same tax-free investment with a lower 3% rate of return. The fully taxable investment initially pays $400 in the first year, but then 28% of that is taken away for tax. Similar treatment occurs throughout the period. After 20 years, the account has grown to $17,645 after taxes. The tax-free investment earns less in interest, but the investor gets to keep all of it. At the end of 20 years, the account is worth $18,061.
Stocks and ETF’s within your TFSA?
Investing in companies and the market through stocks and ETF’s is the best way to earn money on your savings. All you need to know is that investing in these tools is easier than ever before for young people. Apps such as Wealthsimple and Questrade allow you to put money in these accounts to be invested automatically for you. They act similar to your bank account, but instead of leaving the money alone, the app(s) invests in low-risk investment options which allows your savings to grow. Other investment alternatives such as larger companies also offer very intriguing returns. As an example, Amazon shares grew an average of 61% from 2015-2017. Stay tuned for more Futurfund information going into more depth about stocks and investing.
While it may seem daunting to think about, the most important thing you can plan for in the future is your finances. You will need to save large amounts of money for big purchases such as houses, cars, and your children’s education. As soon as you turn 18, opening up a TFSA is the start to investing for your future!
For all those reading who tuned in to our last blog post, you have already read some advice on how to plan, apply to, and budget for, post-secondary expenses. If you missed that, check out the blog post here:
“I wish I knew more about behavioural finance. I’m learning lots, but wish it was something I studied in school. The data is really clear that long-term money success comes from disciplined behaviours over many years, not picking stocks or other “magic bullets”. Yet, most people are really bad at practicing those behaviours. I’m learning more about the science behind them to help myself and our clients at Wealthsimple become smarter about money. I think everyone could benefit from learning about behavioural finance.”
President, SunLife Global Investments (Canada) Inc.
“While attending high school in Saskatchewan during the 1980s, I understood the value of money because we did not have any excess. Having said this, I never lacked for anything and my parents gave me the opportunity to pursue a post-secondary education, the first in my family to do so. I think a key difference was that my friends and I held a belief that as long as we graduated with a University degree, we would be successful and be financially secure in adulthood. In contrast, although my daughters have grown up in Toronto, they still understand the value of money, at least I hope so! However, today a University degree is table stakes and they are already planning their post-graduate degree…while they are still in high school! Further, the competition for entrance into a University is far more intense and there is little confidence of financial security after graduating with a University degree. Many of their friends have accepted jobs unrelated to their degrees and are faced with a much higher relative cost of living. In short, although I had much less money than my daughters when I went to high school, they have less confidence in their financial future than I did.”
Chief Marketing Officer and Head of Institutional Business, SunLife Global Investments (Canada) Inc.
“I was really fortunate to have parents who taught my brothers and I the value of a dollar, and those lessons have stayed with me through my life. One lesson that always stuck with me is…never carry a balance on your credit card because if you do — next time you buy something on your card you are adding 18% to the cost of that item! That really hit home for me. Tough to always adhere to, for sure, but I’ve passed that on to my kids when it comes to credit card debt. However my view of borrowing money has certainly changed over the years, as its foundational to buying a house and getting that first mortgage. And I know many women who borrowed money to invest it in their RRSPs, and this has paid off well for them as they are now approaching retirement with a pretty nice nest egg!”