Top Financial Tips for Your 20s

It is a bit cliché, but it’s never too early to start saving for retirement. Even putting a little away each paycheque can make a significant impact in your golden years.

Your first step is opening an RRSP. Be sure to shop around and find the RRSP that works best for you. The money you allocate towards your retirement savings plan comes from your pre-tax income, which means you won’t be taxed on the money in your RRSP until you pull it out of your account (when you‘re retired and in a lower tax bracket).*

When you make contributions in your 20s, you allow the compound interest lots of time to work in your favour. Compound interest means that you earn interest on the money you put into your RRSP, plus the interest that you make over the years.

For example, let’s say you contribute $1,000 this year, and that money earns you $50 in interest over the year. The following year, you will earn interest on both the contribution ($1,000) and the interest ($50). So even if you contributed nothing in your second year, you would still earn interest on the $1,050 balance.

In addition to your RRSP, be sure to check what retirement incentives your employer offers. Do you have an employer-sponsored retirement savings plan? Do they match a percentage of what you contribute? If they match up to 6%, put 6% of your paycheque into it. Whatever the match, be sure to contribute the maximum amount. Take full advantage of the matching; it is, after all, essentially free money. Also note that all employers offer different incentives.

Along with planning for retirement, you should also prepare for unforeseen events by setting an emergency fund in place. It provides a financial cushion in case you are in between jobs or have unexpected medical expenses. Putting as little as $20 per week into your emergency fund can result in over $1,000 in savings per year!

Once the money is in the emergency fund, leave it. Be disciplined and resist the temptation to spend it on an impulse purchase. The ultimate benefit of an emergency fund is that you’re able to pay for unexpected expenses – like an emergency car repair, a new dishwasher, or your pet’s medical procedure – without maxing out your credit card or paying interest on a loan.

A credit card can be a friend when used correctly, but it can also cause significant problems when used irresponsibly. If possible, pay off your credit card payments entirely each month. One can easily spiral into debt due to high interest rates. Not carrying a credit card balance allows you to take advantage of any applicable reward programs while building great financial habits, and avoiding interest charges.

A credit card is an essential tool to build your credit score. Your credit score reflects how well you manage credit and how risky it would be for a lender to lend you money.

If you can’t get a standard credit card, think about a secured credit card to help you establish credit. A secured credit card functions like a debit card and requires you to pay a deposit to use it, but it allows you to build a credit rating even when you have no credit history.

Your credit score is impacted by more than just your credit card activity. You can build a solid credit rating by doing these four things:

• Pay cell phone, internet, and utility bills on time
• Keep your credit card balance well below the limit
• Apply for credit sparingly
• Check your credit reports regularly

A Tax-Free Savings Account (TFSA) is a great way to save for short-term goals, like a car or vacation. Don’t let its name fool you; it’s not your regular savings account. With TFSA you can turn your taxable income into tax-free income and it includes the following investments:

• Cash
• Mutual funds
• Securities listed on a designated stock exchange
• Guaranteed investment certificates
• Bonds
• Some shares of small business corporations

All the investment gains you make are not subject to tax. Unlike an RRSP, you’re free to withdraw at any time without penalty, making it a better option for more immediate goals like a down payment for a house or car. However, should you decide to replace the withdrawal amount back into the TFSA account that same year, ensure you have available TFSA contribution room.

Your 20s are the best time to purchase life insurance. Your life insurance premiums will typically be lower as you’re more likely to be in good health. Most premiums on plans tend to creep upwards each year that you wait to buy, with a notable spike after 40 years of age. Explore your options as soon as you can; you may be able to receive outstanding term life insurance rates. Term policies can last for 10, 20, or 30 years, meaning that you could have coverage throughout your entire working life at a great rate.

It may seem challenging to navigate this new world of financial responsibilities. The smart spending and saving habits you build now while you’re young will pay off for a lifetime – literally.