Make paying down your student loan a priority
If you just graduated from university or college, you may or may not have a job in your field of study. What you probably do have is a pretty hefty student loan debt load. Many students wonder how they’re going to pay this off. Some hope that their provincial governments implement a student debt forgiveness program down the road, and hold off making any payments at all. Here are some debt management pointers for new grads.
Many of those just entering the workforce after graduation face some daunting challenges: Finding a job; a place to live; paying off those student loans. It can start to sound a little overwhelming. But there are some strategies that can make the transition away from student life a bit less of a shock.
What do freshly graduated students do first?
First, it’s important to take stock financially. You have to make a list of what you earn and what you spend, what you own and what you owe. Once you have a good, realistic picture of where you are now, you can start taking steps to get where you want to go.
Getting a paying job is, of course, your top priority. You’ve got to have an independent cash flow, because you can’t rely on the bank of Mom and Dad forever. For freshly minted graduates, the next single most important short-term financial objective is to start paying down any existing student debt as fast as possible.
Debt is insidious, and compound interest can make the debt load even worse. It’s critical to develop a debt-repayment plan – and stick to it! Pay down principal whenever possible. Skipping payments or hoping for some sort of “debt forgiveness” program is a sucker’s bet. Sitting governments have a way of promising the moon before elections in an effort to “buy” votes – especially if they’re desperate – and then promptly reneging on the promises once re-elected. Dodging a debt repayment, even for a student loan, will affect your credit rating, possibly impairing your ability to get a loan for a car or a mortgage for a home several years down the road. So just don’t go there! If you have difficulty meeting loan repayments in the short term, be sure to contact the loan officer at your school. They may be able to adjust loan repayment terms. But do not simply ignore those payments!
Why start financial planning now?
Although this is just about the last thing graduates have in mind, it’s important to spare at least a few minutes to think about your future. In order to create a long-term plan that will provide a real benefit to you, you need to make some decisions about your future. Make a bucket list of all the goals you want to achieve in your life and when. Attach a rough cost to each goal and then work backwards to determine how much you will need to save to meet each of them.
Save and focus on tax efficiency
Start saving now! Target a certain amount to put aside every month as savings over and above debt repayments. Some advisers say you should save 10% of your gross income. With most grads in their early 20s, that’s probably wildly unrealistic. So save whatever you can, even if it’s only a few bucks a week. You’ll be surprised at how quickly it adds up. Especially if you invest the money in a tax-efficient way.
Open up a Tax-Free Savings Account (TFSA), and invest the money in some good-quality mutual funds, many of which typically let you make an initial investment for as little as $500 or even less. Another option might be a Registered Retirement Savings Plan (RRSP), which lets you contribute a certain percentage of your earned income every year, in return for which you get a tax deduction. Funds grow in the plan on a tax-deferred basis, and are not subject to tax until you make a withdrawal. RRSPs are generally for longer-term retirement planning, and are useful once you get into higher income brackets (and you will).
You can find more information on credit and debt management at the Financial Consumer Agency of Canada’s Financial Literacy Database.
Young grads are exactly at the right stage in life to create a financial plan for a disciplined approach to savings and investing. Stick to it, and you can achieve great things, and probably a lot sooner than you expect.
© 2014 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.