As a recent graduate, you might not think it’s the right time to focus on your finances. After all, you probably have more debt than cash. But in reality there has never been a better time to start planning your financial future. To help get you started, here are four smart-money tips to put you on a solid financial footing for the next phase of your life:
Pay off your student loans
Now that you’ve started receiving a regular paycheque, you may be tempted to start spending it on all the things you couldn’t afford as a student. But if you have student debt, you should focus on paying it off as quickly as possible. Financial professional Kelley Keene explains in her book on personal finance, The Money Book for everyone else, that “although student loans give you a six-month grace period to begin paying down the loan, interest on the loans starts to accumulate the day you graduate.” Paying down the debt as soon as possible can help you to avoid substantial interest charges.
The good news is that after years of being a student, chances are you’re used to living on the cheap. Why not maintain those habits for as long as you can? Hang on to your low-rent apartment, avoid eating out and stick with public transit to help rid yourself of debt fast. Once your debt is paid off, there will be plenty of time to upgrade your lifestyle or buy that smartphone you’ve always wanted.
Sign up for direct debit
It’s important to stay on top of all your monthly payments. Even if you’re only a day late, most credit cards will charge interest on all your purchases from the day you bought them, not from the day your payment was due. As a result, you may end up being charged more interest than you’d expected. Also, late payments can have a negative impact on your credit score. To prevent this, sign up for direct debit from your bank account to pay off your credit card and other monthly bills automatically each month. Just make sure to keep track of your purchases so you have enough money in the bank to cover the debit, or you’ll face overdraft charges.
Open an RRSP and a TFSA
Along with paying down debt, you need to start saving for the future. There are a couple of essential savings vehicles to consider – a tax-free savings account (TFSA) and a registered retirement savings plan (RRSP).In the case of a TFSA, you can save up to $5,500 a year (as of 2013) and, while you don’t get a tax deduction for your contributions, there’s no tax payable on investment growth and withdrawals are not subject to income tax. It’s therefore a great way to save for important goals such as a down payment on a home.
An RRSP lets you contribute up to a certain percentage of your earned income and gives you a tax deduction for your contributions. Again, there’s no tax payable on the growth in value of investments held inside the plan; however, withdrawals are subject to income tax. It therefore works well for savings you plan to withdraw in retirement, when your income and tax level may be less. You can also borrow from your RRSP to help buy a home, under certain conditions.
Join your employer’s pension plan
While retirement may seem a long way off, if your employer offers a company pension plan, there are huge advantages to joining as soon as possible. In particular, if your company offers matching contributions – by putting in an amount equal to what you contribute, or a percentage of what you contribute – you’re essentially getting free money you would otherwise not receive.
It may seem challenging as a new grad to focus on both paying down debt and saving for the future. But one of the most effective ways to build wealth is to always pay yourself first. Setting aside even a small amount to save each month can, as in the example above, make a huge difference in your long-term bottom line.
- Not sure how to begin managing your money? Try our Bright Start tool.