Your Time of Life
A milestone guide to money and investment
this publication This guide is part of Mackenzie Investments’ Your Time of Life series, exploring some of the most common money issues that become priorities at different stages of our lives. We’ve associated these priorities with each decade in age as an illustration, but this is by no means a judgment on what should happen when. We do not expect everyone to stick to any prescribed life schedule. We are simply playing the averages. The 20s edition is primarily aimed at those who are just starting out – young adults who want to enjoy life but also build a foundation for their financial future. We provide an overview of financial strategies to help you reach your goals and to work effectively with your financial advisor.
What’s inside Your life, so far . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Your financial plan . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Your spending and saving habits . . . . . . . . . . . . . . . 7 Your investment strategy . . . . . . . . . . . . . . . . . . . . . 9 Your portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Your tax return . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Your “what-ifs?” . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Your special circumstances . . . . . . . . . . . . . . . . . . 13 Your advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Your life, so far: 20s edition You’ve seen the financial ads – save a few bucks today, let it compound, and in 50 years, you’ll have a gazillion dollars. While the tortoise strategy might seem boring, growing your money the slow and steady way actually works. If it’s excitement you’re after, there are plenty of other ways to get a rush. In your 20s, you want to have fun. This is the time to do the things you want before you get chained to a mortgage and other obligations. Your discretionary spending – clothes, electronics, trips, restaurants and leisure activities – might not be essential, but who wants to sit at home twiddling their thumbs?
If financial planning isn’t on your radar screen, don’t worry – you’re normal. There are lots of other things that outrank financial planning. But if you wait too long, you might wake up one day, wondering where your 20s – and your money – went. This publication aims to provide you with the ideas, tools and, most important, the inspiration to create the financial foundation that will give you options later. No matter what your goals are, there’s good help out there if you know who to turn to and what questions to ask.
Your financial plans are pretty simple at this point: pay off debt from student loans and credit cards, and maybe save for a down payment. There’s no point saving for an emergency fund when you’ve got Mom and Dad, right? Indeed, it’s hard to feel like a grown-up especially if you’re still living at home and aren't completely independent yet.
uman beings are the only creatures on earth H that allow their children to come back home.
Your financial plan
Write it down and it just might happen
What’s the use of happiness? It can’t buy you money.
“When you’ve got your whole life ahead of you, surely financial planning can wait, right?” You know what you want out of life: a satisfying career, an active social life, travel, and eventually a home and family. The future looks bright and there’s no reason yours won’t unfold seamlessly.
The same goes for other goals. The more specific you can be, the better. If you are interested in owning a home some day, think about where you want to go and how you’re going to get there.
Having a mental checklist is all very good but the secret to getting things done is to have concrete goals and a plan (“go to France and Italy next spring” instead of “travel abroad”). By writing down your goals and breaking them into specific “action” items, and then reviewing them periodically, you can ensure that you’re moving in the right direction.
Just because you have a financial plan doesn’t mean you’re eternally bound to it. Your goals, income and obligations can – and will – change over time. If you’re not sure how to get started, speak with an independent financial advisor. Once you make that decision to make a plan, the rest gets easier.
It’s the same with a financial plan. Put simply, a financial plan sets out your goals and helps you to estimate how much money you’ll need to do all the things you want. Even a short-term goal like a trip abroad requires some financial planning. You need to estimate your trip budget (and still add on another 30%) and decide how and how much you can save.
List your most important short-term and long-term goals. How much do you need to save to meet your short-term goals?
Your spending and saving habits Wanting it NOW! There’s a stereotype about twenty-somethings: You’re used to getting what you want, when you want it. Whether it’s stuff, information, or connecting with friends, NOW! is the expected time of delivery. And when you can’t afford to pay for what you want, there’s always the credit card. If the stereotype is true about you, beware. The spend-nowworry-later approach is a bad habit that doesn’t get better with age. If you expect to meet your goals for trips abroad, further education, or your own home, then you’re going to need to get rid of debt and start saving.
The problem of debt Debt is not all bad – you probably know the difference between “bad debt” and “good debt.” Bad debt is money that you borrow to buy non-essential items such as restaurant meals, nights out, electronics, and clothes. They’re things that allow you to enjoy life more but add nothing to your future. Interest charges add up quickly, meaning that your original $50 meal at that restaurant might end up costing a third more if you only make minimum payments on your credit card. When you borrow to spend, you’re in effect handing over a portion of your future income, and limiting your options and opportunities later on.
An example of good debt: your student loan Good debt is money you borrow to make more money. Typical examples are real estate, investments or other assets that have the potential to rise in value. Your post-secondary education (the tuition and basic living costs, not the drinking and partying) is also an example of good debt. Borrowing money to get an education increases your earnings potential.
If you think nobody cares if you’re alive, try missing a couple of car payments.
Earl Wilson, American Columist
If you’re like the average university graduate with debt, you probably owe about $25,000 in student loans by the time you finished. It seems like a huge amount to pay off but if you make some changes in your lifestyle, you can radically reduce this debt. • Share the home. Live at home if you can or live with roommates for a few years. • Re-think the car. Walk, bike, auto-share, carpool, take public transit. • Shun gadgets. If you can’t live without them, then at least wait until their prices fall. • Economize. Use public libraries, buy used, simplify your wardrobe, cut back on cable service. Every little bit adds up. The key is to put away what you save.
item Check out www.burnrate.ca to see how you can afford to save. Using what you save, pay off your high-interest debt like your credit card first.
Your spending and saving habits Keeping a budget – really? Most people have a general idea where their money goes. You have basic food and shelter costs (if you’re not taking advantage of Mom and Dad), transportation, cell phones, other wireless services, clothes, leisure activities, and maybe debt repayment.
The best way to save automatically is through a pre-authorized monthly savings or investment plan. You can arrange for your bank or fund company to take money out of your bank account before you have a chance to spend it.
But it’s often the stuff you don’t think of, and can’t account for, that usually puts your spending over the top. You’d be surprised how quickly all the little expenses add up.
So, how much should you aim to put away? If you’re living at home rent-free, you should theoretically be able to sock away what you’re not paying your parents, and then 10% of your income on top of that. Your financial advisor can help you decide what’s realistic without ruining your social life.
An excellent idea is to keep track of your daily spending, writing everything down from that cup of coffee to gum to magazines. The next step is to create a budget – a plan that shows you how much money you expect to spend and from that, how much money you can save. Keeping track and drawing a budget – both are superb ideas that do work. The problem is, will you actually have the discipline and motivation to keep it up?
If your employer has a program to match your contributions – an employer-sponsored group RRSP, pension plan or other savings program – be sure to join. It’s free money, and since you won’t see it, you can’t spend it, so it will build up quickly.
Make savings automatic Your best chance of saving regularly is to put away money before you see it. What you don’t see, you won’t miss – it’s like the $20 bill you forget in your jacket pocket.
Set up an automatic saving plan outside your RRSP and an investment plan inside your RRSP. Aim to save at least 10% of what you earn.
oday, there are three kinds of people: the have’s, T the have-not’s, and the have-not-paid-for-whatthey-have’s.
Earl Wilson, American Columist
Your investment strategy
The key is to not self-destruct
he only way not to think about T money is to have a great deal of it.
An odd thing happens when you’re financially ready to invest. Suddenly, and for no good reason, you think your money is going to double almost overnight. And with usually no investing experience, you’re liable to make many of the same mistakes that new investors often make. Common mistakes we hope you can avoid:
Goals, objectives, risk
Mistake 1: Starting to invest when you don’t understand how investments work. Educate yourself first.
The best way to avoid these mistakes is to create an investment strategy (which is really just a fancy name for a plan). In forming this strategy, you would look at your goals (e.g. more education, down payment, travel, or retirement), your objectives (e.g. safety, income, growth, a mix of income and growth, tax minimization), and your appetite for risk (e.g. high, low, none at all), and your personal circumstances.
Mistake 2: Taking on too much risk. You’re young but not invincible. Mistake 3: Failure to diversify. With all your eggs in one basket, you could end up with a messy omelette.
You can create your investment strategy with the help of a financial advisor and then review your strategy on an annual basis. Remember, as you get older and your circumstances change, you will need to adjust your strategy.
Mistake 4: Having a short time frame. Don’t sit and watch your investments, hoping to take quick profits. Mistake 5: Thinking you can do it all on your own. No one’s that smart or has that much free time.
item Questions to ask when reviewing your strategy: • •
What am I aiming for? What is my tolerance for risk?
When will I need the money? What do I know about this investment?
Your portfolio The path to diversification First things first: Don’t think about investing until you’ve paid off high-interest debts. If your credit card charges 19%, for instance, you are effectively earning 19% when you pay it down. No investments will give you that kind of guaranteed return.
Always have some cash available, preferably in short-term, liquid investments like money market funds. You never know when you might need it as an emergency fund.
Now, let’s assume you’re reading this section because you’re ready to start building your portfolio. To get started, you’re going to need a minimum amount of money. Depending on the particular mutual fund, minimum investments start anywhere between $500 and $2,500. After the initial minimum amount, you can put in as little as $25 to $50 at regular intervals.
Diversification: Unlocking the secret
How many funds do you need to invest in, and how do you decide when there are over 3,000 mutual funds in Canada?
The problem is staying invested when the market starts to fall. It takes discipline and experience to stick to your investment strategy. You might think you have a huge appetite for risk… until you watch your portfolio decline.
1. The all-in-one solution: You can buy a mutual fund that holds other mutual funds, so that in one fell swoop, you’re diversified and you don’t need to think further. • Fund-of-funds offer a mix of equity and fixed income investments using funds of different companies. • Lifecycle funds invest in funds whose asset mix moves from a greater equity allocation to greater fixed-income allocation as you get closer to your target date. Lifecycle funds generally have the target end date in the name, such as 2020 or 2025. 2. With the help of a financial advisor, you can choose a number of quality funds that best suit your objectives and risk tolerance. 10
“You’re young,” they tell you. “You can afford to make up losses in the market.” So the standard advice for twentysomethings is buy mostly stock funds. That’s fine in theory since stocks have a better average long-term return compared to bonds.
If you’re new to investing, it’s best to start with a diversified portfolio. The core of your investments should be high-quality conservative equity funds. As you add to your investments, you can start putting in foreign funds, including emerging markets. A sample portfolio for your 20s might look like this:
Equities: 80% to 90% Fixed income: 5% to 15% Cash: 5%
Your tax return Build your tax skills
Save for the future
Many people still collect their tax receipts in a drawer at home, then rush them to the fastest tax preparation service just to beat the deadline. That might be the easiest way to get your taxes done but it’s not the most effective tax strategy.
Contribute! Contribute! Contribute to your RRSP! You’ve heard the mantra but here’s the thing: If you’re not earning a lot in your 20s, contributing to an RRSP is still a good idea for many reasons.
By learning the basics of a tax return in your 20s (when your tax situation is still fairly simple), you can slowly build up your knowledge and become more proficient as your situation gets more complex.
Tax-deferred compounding can make your money grow faster for you.
Tax software is a must – paper filing is passé. Calculations are quick and accurate and most software programs will alert you to errors, suggest items you might have missed, and propose certain tax tips. Here are some items to keep in mind: • Always apply for the GST credit. If you’re single and earn less than $38,000, you should be able to get something.1 • Report the interest on your student loan if you have taxes owing. If not, carry the interest forward and you can apply it on your return for any of the next five years.2 • Be sure to carry forward any unused amounts from your tuition, education and textbook amounts if you can’t use all the credits in one year. Alternatively, all or a portion of the unused credits maybe be transferred to your spouse or common-law partner, or to a parent or grandparent who is supporting you. • Deduct qualified moving expenses if you’ve moved 40 km closer for work or school. • If you take public transit, buy a monthly pass so you can claim the public transit tax credit.
However, if you have a large credit card bill, you may want to pay off your debt first instead of contributing to an RRSP. The interest you’ll avoid may be far greater than the tax refund you get with an RRSP contribution. Alternatively, you may want to maximize your RRSP contribution and use your refund to pay down your debt. Of course, if you aren’t in debt, then contributing regularly to an RRSP remains an effective way to save tax – and build your future.
item Starting in 2009, you can open a Tax-Free Savings Account with a contribution limit of $5,000 annually. Do it! You never have to pay tax on your investment earnings.
To find out if you qualify, check out the GST / HST Benefits Calculator at www.cra.gc.ca
For government student loans only. You can’t claim interest from a personal loan or a line of credit, or a student loan that has been combined with another kind of loan, or a student loan received from another country. Source: Canada Revenue Agency
Your “what-ifs?” Stay positive, but prepare for the negative No one really likes to think about their “what ifs” – that part of life that doesn’t go according to plan. And in your 20s, you’re still feeling pretty invincible, right? You don’t expect to get sick, become disabled, get in a car crash or be burglarized.
Health insurance. Our health care system is fairly comprehensive but there are still things that the government doesn’t pay for. If you’ve landed a job that provides health benefits, that’s great. If not, buying your own health insurance is critical.
But life is unpredictable and although the odds of such losses are low, the impact can be life changing.
Tenant’s insurance. If you rent, your landlord probably has insurance that protects the building but not your possessions. Renter’s insurance protects your belongings in case of such things as fires, smoke and water damage, vandalism, and theft. It can also give you temporary housing and liability protection (if someone is injured on your property).
Insurance basics Insurance is a way of getting you back to your original position so that your loss becomes manageable. Here are some situations that you might need to hedge against: Car insurance. It’s mandatory if you drive so the key is to keep your premiums low. As you get older, your rates improve, so shop around. Showing stability gets you points. Building a good credit history and getting married are both signs of responsibility.
item Shop around for all your insurance needs. Make sure you understand what’s covered so that you’re not over- or under-insured in any area.
Disability insurance. The chances of your becoming disabled are fairly low at your age so premiums should also be low. But if your workplace has injury hazards, consider disability insurance – especially if your employer does not provide it. Life insurance. If you have family that would face financial problems if you were to die, then you’ll need some life insurance. Speak to your advisor about the type of insurance that is best for your situation.
Your special circumstances
You can be young without money but you can’t be old without it.
The age of too much choice Take a look at all you have right now: youth, health, freedom, and choices. Lots and lots of choices – except that you might not know what you want to do. Your 20s are the best time to travel or live abroad, get more education, try new careers, and just experience life. You’re not tied down in the same way you might be later on. But when you’ve got so many options, how do you decide what to do? Welcome to the angst of wanting-it-all. You know that making one choice will preclude another, and making a wrong one could spell regret. If you look at the things older people regret the most, they involve choices over education (e.g. should have stayed in school, gotten another degree, studied harder), career, romance and family. If only you could know now what you’ll know later…
Start the saving habit The best way to keep your options open for as long as possible is to have the financial resources available. Basically, it means you’ve got to save, save, save. What you spend now, you won’t have for the future. (Trust us, you’ll want it for the future.) Regardless of what you do, make saving money a habit.
Here are some examples of goals you might have: Become financially independent Buy a car Buy a home Get a new job Get a university degree Get in shape Get married Get out of debt Go to concerts Have a baby Learn to cook, dance, take pictures
Live abroad Lose weight Make new friends Meditate Pay off student loans Quit smoking Read more books Save money Start a business Travel abroad Upgrade skills Volunteer Write a book
When you sit down and think about it, you may realize you have certain concrete goals in mind. The key is to write things down and create a plan. Most of the time, you do know what you’d like out of life. 13
Your advisor Building a solid financial plan calls for discipline. The reality is, many people don’t have the time, interest or experience to closely manage every investment detail. Even if you are an experienced investor, a second opinion can highlight things you may overlook. That’s why working with a financial advisor makes so much sense. Here are some of the benefits: • Helps you define your goals and create a comprehensive plan tailored to your needs; • Keeps you focused on your investment plan through the ups and downs of the markets, resulting in higher returns over the long term; • Actively monitors your investments to ensure that they continue to meet your needs; • Puts you in touch with other experts, such as accountants and insurance advisors, to help you adapt your financial plan to changes in your life, job and family situation; • Helps you sleep more soundly knowing a qualified professional is looking out for your best interests.
Resources Investment basics An overview of investment concepts, plus interactive quizzes to assess your risk tolerance, tips for choosing an advisor and more. The Investor Education Fund was established by the Ontario Securities Commission, the province’s securities regulator. www.investorEd.ca
Household finance What is the financial impact of your current spending habits? Use Mackenzie Investments’ Burn Rate materials and tools, plus a fun online test, to help put your spending and saving habits in context. www.burnrate.ca
Online calculators Crunch your own numbers with our easy-to-use, online calculators. Create a net worth statement or try different scenarios for saving, investing or paying down debt so you can refine your financial plans. www.mackenziefinancial.com/calculators
This brochure is published by Mackenzie Financial Corporation ("Mackenzie") with information that is believed to be accurate at the time of publishing. Mackenzie and its subsidiaries and affiliates are not liable for any errors or omissions. This brochure is intended to provide general information and should not be construed as specific legal, insurance, or tax advice – please consult your own legal and tax advisor. Individual circumstances and current events are critical to sound planning; anyone wishing to act on the articles in this brochure is best instructed to consult with his or her Financial Advisor. 15