Student personal finance in a nutshell

Recently, I attended the Grad Steps financial planning seminar to see if it is worth it for students to go. The simple answer is yes. And as a general note, most of the Grad Step seminars are worth your time. The purpose of the financial planning seminar is to provide basic financial planning information to students interested in the topic.

In general, personal finance may be broken down into two steps: first, save and invest; second, repeat step one.

However, before you start to get serious about your personal finances, you need a financial goal. In my opinion there is no better personal financial goal than financial independence. Financial independence is having the ability to decide if you want to work or not and on what you would like to work on. Easy concept to understand…now how do you achieve it?

You need to save 10% of your gross earnings every month and invest it in an account utilizing the power of compound interest. Essentially, compound interest is taking the money that you have earned from your investments and reinvesting it.

Now you may or may not have heard of compounding interest before and if you have or haven’t, the way that you make compound interest work is by having your money work for you.

Here is a brief list of ways you can make your money work for you:

  • GICs pays you interest
  • Government or corporate bonds pays you interest
  • Stocks pays you in dividends or capital gains
  • Mutual funds pays you in dividends or capital gains
  • Electronic trade funds pays you in dividends or capital gains

These are all options for you that provide their own benefits and are best understood on a spectrum of risk (low risk to high risk). In general, you should have a mixture of all of them to make sure that a decrease in one can be compensated by an increase in another.

However, people like Mark Cuban believe that diversity is for suckers….so there is an element of subjectivity to investments just like taste in art or food.

Regardless of your taste, trying to time the market is not as effective as cost averaging. Cost averaging promotes regular investments at time intervals e.g. $100 every month.

The reason to purchase investments regularly is because the peaks and valleys of your investments will even out over time as long as your keep regularly investing.

So, with compound interest and cost averaging working to make you financial independent, how do you handle taxes?

If you are making a lot of money then RRSPs are great for reducing the income that you have to pay taxes on i.e. taxable income. So, if you make a high wage and are in a higher tax bracket, investing in RRSPs will help reduce your taxable income to a lower tax bracket and save money on income tax.

Alternatively, if you make a low income and consequently are not in a high-income tax bracket, then the TSFA is the way to go because any income you make in a TFSA is not subject to taxes.

Preferably you could put money into an RRSP to reduce your taxable income, then put any tax savings as well as anything extra into your TFSA to let your money grow without being taxed in the future.

Overall, the one-hour presentation provided a great starting point for students. It also talked about purchasing a home and disability/life insurance.

One thing that was missing from the presentation is how to handle debt, which is an important issue that many Canadians face, with some surveys finding that up to 50% of Canadians are living pay cheque to pay cheque. If you are having trouble dealing with your debt, then the Canadian Credit Society or Community Financial Counselling Services in Winnipeg are both excellent resources to look into.

Regardless of your situation, personal finance is a stressful topic that some people simply do not want to talk about. Currently, increasing costs of education, limited employment opportunities, and ever increasing housing/living costs are negatively impacting most students’ lives. However, there are resources available to help you along the way!

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