Financial Fitness Part 2. Good financial habits for 25 to 35 year olds
In this edition of Financial Fitness, WealthBar speaks to those who are just starting out in life financially. We’re here to help you build good financial habits for life!
Young people really have an edge when it comes to physical fitness. Not too many 40-year olds make the NHL draft. But when it comes to financial fitness, the tables are turned! If you’re aged 25 to 35, your bank account is probably not as buff as you’d like. You are not yet in your prime earning years.
Meanwhile, you’re working off student debt, buying your first home, getting married, having kids… well, keeping financially fit is a constant, grinding workout!
Setting financial goals for Canadians 25 to 35
If you’re already a WealthBar client, you may have a bit of a leg up. How much of an advantage? Well, we ran the numbers, looking what our clients have in investable assets versus your average Canadian in your youthful age bracket.
Even WealthBar clients who are just starting out are already more financially fit
|Age||WealthBar Client||Canadians||WealthBar clients are X% richer|
(How did we get these numbers? WealthBar numbers were derived using the average total investable assets as reported through client account applications. For Canadians’ investable assets, we took our numbers from Statistics Canada.)
How do these numbers compare to your situation? Wish you had a bit more in your wallet? Hey, if you’re 35 or younger, you’ve got a big advantage: lots and lots of time to get in shape! And we are your financial personal trainer. Okay, let’s do this!
Lose the weight of student debt before you climb the property ladder
It takes Canadians between 9 and 15 years to pay off their student loans. The timing matters a lot if you’re getting to the age where you’re looking at buying your first home.
That’s because mortgage lenders take student loans into account when you are applying for a mortgage loan. (They’re also looking at variables like your income, job history and available funds — so try not to quit your job or switch careers two weeks before you get into the real estate market.) Haven’t paid off your loans yet? That might affect your credit score, which could reduce how much you can borrow. But when you’re buying a home, you want to maximize your purchasing power (even if you don’t borrow to the maximum).
Just like in the weight room, you may be tempted to cheat. You’ve seen how the government has written off $200 million in outstanding student loans from over 34,000 students. And you know that this is the third time they’ve done it! If you wait and just don’t pay it back, maybe they’ll do the same for you?
As your personal trainer, you know what we’re going to say: you’re only cheating yourself! Don’t count on anyone else to do the hard work for you. Even if the government paid off your loan, you still could face the hit to your credit rating. It could take years to get that rating back into healthy territory!
To get the best bang for your buck, pay off as much as you can within six months of graduating. All your payments during that time frame will go directly to paying off principle, instead of going to interest. Here’s a handy checklist and some extra tips from the Financial Consumer Agency of Canada to help you get on track. Paying off debt can be painful… but as they say, no pain, no gain!
Making financial fitness work out with a partner
In the gym, you might have a partner to spot you at the bench press. You want a partner who will help keep you safe and be the best you can be… and it’s similar with finances. In your 20s or 30s, if you’re in a relationship, you want to build habits for success right from the start.
When we asked CBC personal financial advice commentator Rubina Ahmed-Haq about this recently, she explained:
“Most couples come with their own set of financial values. Whatever financial situation they grew up in, they bring to their marriage or partnership… For instance, one person is used to spending on get-togethers at social events or holidays. This could be a point of frustration for someone who might not have grown up spending hundreds of dollars on these kinds of things every weekend. Those expenses can add up fast. Or imagine living with someone who loves changing their car every four or five years, but you’re a bike and transit person. Right there, you’ve got a conflict.”
To stay financially fit, you’re going to have to get on the same track. That means having an honest discussion about money, the earlier the better.
But it doesn’t necessarily mean joining your finances together right at the hip. While many couples set up a joint account in the past, with paychecks going into a single pool, many don’t. In fact, just 28 percent of Canadian couples have joint accounts.
However you’ve set up your accounts, you will need to cooperate on planning for big purchases and vacations. Talk about who is responsible for what (if you have one partner who makes significantly more money than the other — and what happens if that changes). For those purchases that are happening in the short-to-medium term, set up a TFSA instead of a savings account, to take advantage of a better return and lower taxes.
Getting in financial shape for your big day
The best things in life are free, but getting married is expensive. And while more and more of us are putting it off for as long as possible, by our early 30s, a lot of us tend to get hitched (either with a wedding ceremony or common-law). That $125 marriage license is a drop in the bucket compared to what you’re likely to spend on the big event!
A Global News poll showed Canadians thought $9,000 was good enough for a wedding budget… but that seems like a lowball figure. An informal survey of WealthBar employees conducted by yours truly put the figure at $30,000. And according to Moneywise Magazine, the actual budget for a wedding could be over $46,000 — even before the honeymoon!
So, how do you stay financially fit without breaking your budget? The same way you save up for anything: use a budget.
Set aside money every month to help pay for the wedding, or just certain wedding-related expenses. Even a few hundred dollars every time will soon add up. (WealthBar lets you name your accounts — so you could name a TFSA ‘Wedding Ring’ or ‘Honeymoon Vacation’ and check in to make sure your little love fund is on track). Now your marriage is off to a healthy start, instead of coming back from your honeymoon with a financial hangover!
Building a foundation for financial fitness with your first home
“Buying a home is the biggest purchase of your life.” How many times have you heard that? Well, it’s even more true today, with home prices between 2 and 3 times of what they were in 2005 (depending on the size of the home). Taking out a mortgage is some of the heaviest lifting you will have to do when it comes to your finances!
That means, when you buy a home, unless you’re independently wealthy (in which case, this article isn’t for you), you’ll probably need to borrow a lot of money.
Some people feel a stigma around having debt. But keep in mind, mortgage debt is generally considered to be good debt, compared to something like credit card consumer debt. You’re not just borrowing money: you’re building equity. Second, even keeping in mind inflation, younger Canadians are paying through the nose for less square footage compared with previous generations. That’s just a fact.
Still, there are ways first time homebuyers can get into the housing market. For instance, if you’ve managed to save in your RRSP, you can use $35,000 for your downpayment (basically, lending to yourself) through the Home Buyers Plan. What you might not know: if you’re married, you can both use it, for a total of $70,000! That will put a dent in your downpayment.
Even with that advantage, you’ll need to get the best rate possible when you borrow. You’re not just paying the purchase cost of the house. You’ll also pay interest. In fact, most of the mortgage payments you make in the first few years will be on interest, not drilling into the principal until later. Check out this mortgage stress-test table provided by Global News to see what you might be able to afford.
Our advice: shop around for a mortgage broker who can get you the best rate. One advantage the younger generation has that didn’t exist even a few years ago is that you can shop online easily to find the best rate!
If you’ve been with a bank for a long time, you might be tempted to just go with whatever they’re offering. Instead of getting one quote, using a mortgage broker gets the banks and other lenders competing for your business — and ultimately, getting you the lowest rate possible. Consider looking at sites that track the best rates, like ratehub.ca to make sure you’re getting the best deal. Don’t be afraid to ask your mortgage broker or banker if they can do better.
Make sure you’re covered as you’re bench-pressing your heaviest investment
One last tip for first-time home buyers: you probably haven’t thought about insurance on your mortgage… which is exactly what the old-school bank mortgage people want. Mortgage insurance is one of those things people tend to buy about 10 seconds after they’ve even been introduced to the topic. It’s just a check-box on your mortgage application if you’re using a bank. But you’re probably better off with term insurance, which can provide better value over the long term! Don’t be guilted or pressured into a financial obligation. Check out your term insurance options before you get to this point!
Buying a home is a big decision. It’s a heavy weight on your finances when you’re just starting out. When you’re young and just figuring out your career and life direction, it might not even make sense to buy. When you buy, you’re building equity — but when you rent, you’ve got flexibility. If rent is low enough, you can still invest some of your earnings while you literally follow your career wherever it takes you. That could be priceless early on as you are building a foundation, financially-speaking.
Did you find our financial fitness advice useful? Which tips do you plan to put into action? Do you have a different opinion about the best way to build those financial muscles when you’re 25 to 35? Leave a comment and let us know!