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Investing: Start young, even if cash is tight

Posted: June 12, 2017

Investing in the stock market is likely the last thing on university students’ minds. After all, they are already making an investment in their future, often paying tens of thousands in tuition for an education they hope will be the foundation of a long, fulfilling career.

But even a starving student – or emaciated recent grad – can boost the bottom line with a few shrewd financial moves that could pay fat dividends years down the line.

Track and save

Spare cash for students is like a UFO sighting: rare and likely improbable. But Mack Rogers with ABC Life Literacy Canada, which provides financial literacy programming, says young Canadians can still save a little money. To do it, however, they need to track their spending to free up cash. This means creating a budget, says the Toronto-based non-profit’s executive director. It need not be a major undertaking. A couple of hours a month are all that is required to follow the money and uncover cash spent on frequent, recurring frivolity that can be diverted to more frugal pursuits – like saving for the future. “If you can make [diverting cash for savings] a habit, you will at the very least have some funds building up while working toward other goals, like paying down debt,” Mr. Rogers says.

A no-brainer approach

The less you have to think about saving, the better you are going to be at saving. Let the wonders of fintech (financial technology) do the work for you, instead. Automate savings, debt and bill payments whenever possible. Apps will even track spending, eliminating the need to budget. “The fewer decisions you have to make every month when it comes to your finances, the fewer opportunities you will have to make bad choices,” says Kyle Prevost, financial blogger at youngandthrifty.ca. “Candidly, it’s just not our nature to save money,” says Josh Olfert, a financial advisor with Haven Wealth Management in Winnipeg, specializing in financial advice for millennials. “Luckily you can overcome this by having a machine do it for you.” Ideally, an automatic withdrawal of 15 per cent of income a month is a good start for goals such as an emergency fund – which is about six months’ worth of expenses – and afterwards for more long-term aspirations, like retirement or buying a home.

Do your homework

Competency in 19th-century English literature is generally not all that helpful when trying to accumulate wealth. But students of the humanities are not alone. Most people face a steep learning curve when it comes to investing and wealth management, Mr. Olfert says. So doing a some homework is critical. “Finance is a complex world, so the more you read, the more you will understand,” he says. Don’t know where to turn to learn the difference between equity and fixed income? While the Internet is rife with information, it is important to be aware that not all sources are equally helpful. Blogs written by financial advisors, the business sections of reputable media sources and education sites, such as the Ontario Securities Commission’s GetSmarterAboutMoney, which provides information and financial tools, are places to start. These sources can also point you to other excellent materials, such as blogs written by non-industry professionals (for example, youngandthrifty, which is especially geared toward younger savers.)

TFSA versus RRSP

Don’t get tripped up figuring out what savings vehicle works best. Making a contribution is a positive step whether it is to a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA), Mr. Prevost says. “Way too many young Canadians experience paralysis by analysis when they are trying to determine how to save and invest,” he says. “Pick one and you can always adapt as you move forward.” Still, Mr. Rogers says the TFSA is likely a better choice for young investors because of its flexibility. Money can be withdrawn for any reason without penalty, and unlike an RRSP, you get the contribution room back.

Time is on your side

Experience may be lacking, but youth have one thing in spades, generally. That is time and it is a crucial ingredient for wealth building. Quite simply, the sooner money is saved, the more time it has to grow, thanks to compounding returns – be it interest income from GICs or bonds, or capital gains and dividends from stocks. More time also affords the chance to invest in riskier assets – like stocks – to reap more reward, long-term. Consider the following comparison: $25 saved weekly and compounded over 20 years at 2.9 per cent – the 20-year return for short-term (low risk) government bonds from 1997 to the end of 2016 – will grow to more than $35,000. The same amount earning 7.3 per cent – the total annualized return of the TSX composite index over the historical period – will grow to more than $58,000.

Profitably simple

For newbie investors, “keeping it clean and simple is often the best strategy,” Mr. Rogers says. To start, try setting aside a few dollars weekly into the markets. For small contributions, mutual funds generally offer the lowest-cost access. If fees are a concern, and they should be, select index funds with lower management costs. These passively managed funds emulate the performance of an underlying index, like the TSX composite, rather than trying to beat it – which most actively managed mutual funds attempt, and often fail, to do. As the invested capital grows, so, too, can the portfolio’s complexity. Start an online brokerage account for do-it-yourself stock, bond or fund picking. Or sign up with a robo-advisor and build a low-cost portfolio of exchange-traded funds (ETFs) – essentially index mutual funds but with lower fees. An added bonus of robo-advisors: Many cater to small investors with no minimum account size to start.

Be visionary

Budgeting, saving, researching and investing are all for naught without clear goals. Objectives don’t need to be crystal clear, but fleshing out these financial milestones, such as saving for a home, even just a little can go a long way to developing a sustainable plan, Mr. Olfert says. “Without a clear picture in your mind about the end goal, there’s a low probability you’ll take the actions necessary to implement a financial plan, never mind stick to it.”