When I first graduated from university, my primary goal, like most, was to find a decent paying job. I had rent to pay, things to buy, etc. But as my early working years slowly bled into a career, I started to become more cognizant about planning for my future. While retirement was still a long way off, I had learned about a few interim steps I could start working towards along the way.
The Canadian Government offers first time home-buyers, the opportunity to essentially borrow from themselves. Canadians can use up to $25,000 from their RRSP (Registered Retirement Savings Plan -- Canada's 401k to any Americans reading this) balance as a down payment. Unfortunately, shortly after I purchased my first condo, I stopped contributing to my RRSPs with any regularity. Okay, I stopped completely.
Fast forward, it has now been almost 10 years since my first condo purchase. Unfortunately, it has only been five years since I began refocusing efforts on my retirement savings portfolio. What I have come to learn since, is for those five years when I took my RRSP vacation, I missed a real opportunity to have my savings working overtime for me. So while I am still more than 20 years away from retirement, I am now forced to take a more aggressive approach to savings for the future.
I compare myself to that kid who dropped out of school, but years later, decided to go back to complete their education. There's nothing stopping me from graduating, but now I have to work a lot harder, and commit myself to my plan with a little more urgency. The reason? It's just the way the math works.
If someone 25 years of age contributes $100 bi-weekly into a RRSP until they are 65, on average, they will have more money saved, then someone who puts $300 a paycheck, but who waits to start contributing at 40. (This example assumes an average rate of return of 6 per cent.) Seems crazy, right? How can 25 years of contributing $600 a month, not work out to be more than 40 years of only putting away $200 a month? Simple. The longer investment period allows interest the time to earn interest on itself. A term known as compound interest.
Anyway, what I am writing is not new. What I'm hoping to convey, however, is the importance of putting an action plan together, today, even if you are very new to the workforce. How do you do this? The easiest way is pay yourself first. This means having your RRSP contributions automatically deducted off every pay. Fewer and fewer of us ever see a physical paycheck anymore. Make this technology work in your favour before you ever have a chance to spend the money. You can't spend what you never see.
Experts suggest you put 10 per cent of what you earn into savings every year. I realize this is not always realistic, especially if you have debt from school or credit cards, and are just starting out. Instead, my advice is to start the habit of saving now -- not later. Habits, good or bad, don't emerge overnight. They take time to form. This is my key takeaway. We all like repeating things we are good at. Once you start to see that small RRSP balance grow from a few hundred dollars, to a few thousand over a few years, you will be amazed at how much easier it will be to commit more of your disposable income, as your career progresses. It will feel less like a burden and more like a routine just like buying groceries.
Furthermore, many employers offer RRSP employee matching programs, where they contribute a percentage of every dollar you do. Who doesn't love free money, right?
Finally, don't be afraid to enlist a financial planner to manage your money, even if right now you have a very small investment portfolio, or don't have one at all. In your initial years, you will never be a great source of income for your advisor, but down the road you may be. So it is worth their time to work with you early on, to keep you as a satisfied client long term.
Hindsight is 20/20. We all wish we knew then, what we know now. Where we can cheat time however, is to pass along our "woulda, coulda, shouldas..." to those even half a generation younger, to give them a leg up and help them avoid making the same mistakes we did.
Ironically, I am currently finishing the editing phase of my first novel; one that centers around a 20-something, university graduate, whose life has spiralled out of control much in part because of his financial instability. But since that story is fiction, and drama is better left for our amusement, I thought it made more sense instead, to impart some of my own experience here, so that we can let what not to do, remain just that: fiction.
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