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Invest Well. Live Well: Seven financial tips for young adults starting out

Incorporate some of these strategies at a young age and we feel you will be setting yourself up for success for years to come
Eric and Keith Davis

One of the best aspects of our jobs is walking the path of life alongside our clients.

As their kids grow up, we often are asked to share financial advice for young adults just starting out. As with most things in life, the sooner we can build good habits, the better off we tend to be. Also, small habits can quickly add up.

• Build a budget: First and foremost, you need to understand where your money is going if you want to make any changes. There are lots of free online budget tools and apps that can help. From here, you can build a plan and where to direct that money. Consider setting up a savings bucket for short-term goals (ie: trip, car, etc.) and investing bucket for longer-term goals such as house purchase or retirement.

• Pay yourself first: Having automated savings that come out of your bank account after each pay day is a great way to build strong savings habits. Start small and then review once or twice a year to see if you can increase the amount. Any time your income goes up, we recommend your savings rate goes up by the same percentage.

• Keep debts in check: The mentality of buying an item because one can afford the payment will not get many people ahead in life. Getting a new vehicle every few years and reloading a car payment can take hundreds of dollars a month out of your pocket that could be directed towards other goals. According to finder.com, the average monthly car payment in Canada ranges between $400 and $800 over 72 months. The website also suggests spending between 10 and 15 per cent of your disposable income on a car payment.

• Avoid credit card debt at all costs: Paying 20 per cent interest or more on credit cards will decimate your cash flow. It is paramount to try to pay this down as soon as possible. The points or rewards you can earn on a card are not worth the interest charges. Lowering credit card limits, using only one card or even leaving your credit card at home are some steps people take to get out of debt. Another step can be to try to roll your credit card debt into a debt consolidation loan at a lower interest rate.

• Start investing early: Albert Einstein called compounding interest the eighth wonder of the world. If you start saving $250 a month at age 20 and earn seven per cent on your investments, by the time you are 60, you could amass $598,900. Compare that to starting at age 40 and you would have accrued only $122,986.

In fact, a 40 year-old would need to save more than $1,160 per month to get to the same outcome as the 20-year-old. Bonus tip for the young savvy savers — investing $5,000 per year ($417 per month) stating at age 20 and using the seven per cent return would hit $1 million by age 60.

• Learn your work benefits: Some jobs will match retirement savings (free money!), offer share purchase plans and many other perks that can help accelerate your savings goals. They may also offer employee discounts at various retailers, hotels and more to stretch out your hard-earned dollars.

• Protect your most valuable asset: You are the most important asset you have. One stat from disabilitycanhappen.org states that one in four of today’s people over 20 can expect to be out of work for at least a year because of a disabling condition before they reach the normal retirement age of 65. We believe it's important to have life and disability insurance in the event of a major setback. If applicable, review your work coverage and consider additional insurance as needed. Added perk — insurance tends to be inexpensive at a younger age.

If you can incorporate some of these strategies at a young age, we feel you will be setting yourself up for success for years to come. As always, we recommend working with a trusted advisor.

Until next time… Invest Well. Live Well.

Written by Keith.

The views expressed are those of Eric Davis, Senior Portfolio Manager and Senior Investment Advisor , and Keith Davis, Associate Investment Advisor, TD Wealth Private Investment Advice, as of July 13, 2022 and are subject to change based on market and other conditions. Davis Wealth Management Team is part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank.