SMART MONEY: Answering the questions of young adults
By Brad Brain
I have three kids. Two are in university, and one is heading into Grade 12. I asked them for some insight into the types of financial questions that young adults would like to understand better.
All of these answers are necessarily going to be succinct. For a more fulsome discussion, consult a professional financial planner.
“What happens to First Home Savings Account if you never actually buy a home?”
This is a great question. First Home Savings Accounts are the new, cool planning opportunity that will help someone save for their first home. You get a tax deduction for your contribution, and you can take the money out tax free. Think of it as combining the best features of RRSPs and TFSAs. I like FHSAs so much I made my own kids get in as soon as possible.
To answer the question about what happens to a FHSA if you don’t buy a home. it’s no problem. Just roll the FHSA into your RRSP. You maintain the tax deduction and the tax-free transfer does not go against your RRSP contribution room.
“Should I prioritize paying off debt or investing?”
This is also a great question, but there is a lot more to it than you might think. The correct answer is, “It depends.”
The relevant variables include what is the interest rate on the debt, is the debt tax deductible, what alternative investment are you considering, what’s the tax status of your investment, when do you need the money, how willing and able are you to carry debt, etc.
A deep question like this deserves a full answer, but it is pretty safe to say that any high-interest debt – such as carrying a balance on your credit cards – is a significant impediment to building wealth. Regardless of what else is going on in your life, it will be rare when paying off credit cards in full will not be the first priority.
Having said that, getting an early start on investing means harnessing the splendour of compound interest. If you start socking away money early in life you are setting yourself up for massive financial achievements later.
So, yeah, it depends.
“What kind of insurance do I actually need right now?”
Again, it depends. As a university student with no dependents, you might not need any insurance at the moment. But, if you don’t need it now, you probably will soon. Once you have people reliant on you, you should look at making sure you are protected. Remember, insurance is not always about you. Often its about the people you care about.
You will be able to afford all the life insurance that you need if you buy term life insurance. Term life is custom built for young, healthy people.
The more expensive insurance that you need to know about is not life insurance, it is disability insurance. And the reason that disability insurance is more expensive than life insurance is because you are more likely to need it. Don’t get discouraged by the premium. If you want to really know what expensive is, think about being uninsured when catastrophe strikes.
“What’s a realistic financial goal for someone in their 20s?”
This is an insightful question. We live in a world of instant gratification, where can seem like we should be able to get everything all at once. But real life is not like the artificial world of Instagram where people post only their highlights.
The biggest, best thing you can do is to live within your means. If you start out right, you are going to give yourself a tremendous advantage. Don’t get sucked into unnecessary debt. Build an emergency fund. Identify what it is that you really want in life and make your decisions based on what matters.
“What percentage of my paycheque should I be saving or investing?”
The textbook answer to this is to save 10 percent of your income and live off the remaining 90 percent. But the best answer to this question is, “save whatever you can.” If you have to start with just $20 per month, at least you started. Over time you can increase your savings rate. Just start.
As you approach adulthood things start coming at you fast. You will have all sorts of challenges, but also opportunities. It can be a scary time, but it can also be exhilarating.
Money can be an intimidating topic for anyone, not just young adults. I encourage you to invest some time in your own financial literacy. Making smart decisions about money will pay off big time.
After all, the alternative is to make dumb decisions about money. And usually that doesn’t work out so well.
Brad Brain. CFP, R.F.P., CIM, TEP is a Certified Financial Planner in Fort St John, BC. This material is prepared for general circulation and may not reflect your individual financial circumstances. Brad can be reached at www.bradbrainfinancial.com.