Finally some good news — you’ve landed a major promotion with a huge pay bump, or you’ve finished many years of education and entered a high-paying profession.
Either way, you have some extra cash, and perhaps little else, aside from a student loan.
The act of seeking out advice — or even just starting the conversation with yourself — is worthy of praise, says Brian Himmelman, president and financial planner at Himmelman & Associates Financial Advisors in Halifax.
“It’s just so easy to … treat [a pay raise] like lottery winnings and say, ‘Oh, I finally want to get that Canada Goose coat, and guess what, I’m going to book a five-star vacation’ … and boom, that differential is gone,” Himmelman says.
Now is the time to decide what is important to you, says Brandon Wiebe, a fee-only financial planner with Money Helps, based in Saskatoon. The first financial conversations involve setting priorities for the near- and long-term, and involving partners, if you have one.
At this early stage, Wiebe says, a tax-free savings account can offer flexibility for someone who wants to save and have tax-sheltered growth, but might change their mind on their priorities in the future. Paying down student loans and other debt is another goal that may be high priority — or not, he says.
“I think some of the conversation [around debt] will kind of focus on a couple of different points,” Wiebe says. “One: what is the interest rate? How does that compare with what they would possibly be able to expect in returns if they’re investing the money instead? And then, how do their student loans make them feel? You know, are they stressful?”
For some, paying down student debt slower but investing sooner is the smarter move.
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Both Himmelman and Wiebe favour the “bucket” approach, where disposable income is branched off into various areas, from debt repayment to saving, from investing to spending.
These buckets can change over time, just as priorities shift throughout life.
For a younger person with a certain amount of extra income every month, Himmelman says one possible arrangement could include three buckets: student loans, saving for a down payment, and retirement. Factoring in their age and goals, roughly 25 per cent extra could be dropped monthly on the loan, 50 per cent goes to the future house, and the last 25 per cent is put aside for long-term security — a great habit to start early.
Himmelman also recommends saving a few months’ worth of expenses in case of an emergency, before saving more aggressively for a home.
“All these amounts are moving sliders based on the individual, their circumstances, their conviction, and their priorities,” Himmelman says.
“So somebody who’s making lesser income now, but they have a career where maybe they’re making twice as much in a few years — they’re better off concentrating on a TFSA. And people who are higher earners right out of the gate might be better off with the RRSP, because of the tax deduction.”
Although saving for a home is a major priority for many young Canadians, home ownership is not the only way to gain financial security, Wiebe says. He prefers if clients prioritize owning a home for lifestyle reasons — wanting to stay put, wanting control of their space — rather than purely financial.
“I do advise people to try and stay away from speculation, that ‘I need to get in now’ type of thing,” he says about the real estate market.
In Himmelman’s experience, clients that bought and invested in real estate tended to have a higher net worth — but that doesn’t predict the future for everyone.
“[Some clients] might not just be wired for home ownership, and there’s absolutely nothing wrong with that,” he says. “A person can create a perfectly healthy long-term financial plan without home ownership.”
The last bucket should be for fun. After near- and long-term goals are accommodated, Wiebe says, these hard-working individuals should enjoy their rewards, whether it’s more travel or a nicer car.
“Once they’ve taken care of the responsible part of it,” he says, “then they can actually take a look and see which of those financial things … brings them happiness.”
Himmelman agrees. He notes that among his clientele, he has scrupulous savers that have now reached their 70s, and have more money than they could possibly spend. Now that they’re older, travel and some hobbies are less appealing than they once were.
“They were so paranoid about not having enough money, that they overshot the runway,” Himmelman says.
“There is something to be said about enjoying your money while you’re healthy. The name of the game is that balancing act of enjoying your resources and still having enough to look after you on the back end.”
