Surveys these days paint a pretty sorry picture of today’s college graduates, saddled with student loan debt, along with regrets over their financial choices while they were in school.
Take a recent poll by BDO Canada that found 67 per cent of Canadians under 40 graduated from college with an average of $22,084 in debt. Three-fourths of them also regretted their spending during those years, wishing they’d been more frugal in their budgeting (30 percent) and stayed away from credit cards (25 percent). And 62 percent of them are still paying off their student loans.
The upshot is a story I’ve seen a hundred times. If you’re like many, those loans are a big psychological burden that you can’t wait to shed, and toward that end, you put as much of your paycheck as you can against the total.
But, as it turns out, that may be the worst thing you can do. Doing that may keep you from pursuing other goals that are more closely tied to what you ultimately want from your life and career. What are your priorities? Setting them can be especially difficult for 20-somethings because there are so many possibilities ahead of you.
I met both Jessica and Michael several years after the finished university. Both had just finished spending 3 years paying off their student loans and now wanted a plan to figure out what to do next.
Jessica wanted to buy her first home, which she felt would give her security. However, she had barely started saving for a down payment. She ended up buying with 5% down and paying a $15,000 CMHC fee. If she had just made minimum payments on her student loan, she could have had a much higher down payment and little or no CMHC fee.
Michael wanted to buy a car, which would make him feel independent. He was smart by buying an older used car, which saved him lots of money, but he bought it with a car loan at 8%. If he had made minimum payments on his student loan, he could have saved enough money to by the car for cash. The student loan was at 4% and gave him a tax credit. He would have been better off to still have the student loan and no car loan.
Maybe paying off your student loan is one of your goals, since you don’t like to have debt or that regular payment. Maybe you’re working toward greater independence, moving out from your parents’ place or buying a car. Or you figure that regularly putting money aside for future home ownership will ensure you can do that in the next five or ten years.
Here’s one goal that may be hard to wrap your mind around, but something that could mean your eventual financial freedom – saving for retirement. And actually, starting to save for retirement now would be a smart move. Investing $500 a month now at an average 8 percent return would give you $284,000 after 20 years, $704,000 after 30 and $1,611,000 after 40.
For today’s graduates, thinking about your priorities now will help establish a roadmap for the future. Set priorities based on what you want from your life and career and how both could progress in the next five or ten years. Think about sitting down with a certified financial planner to figure out the financial implications ahead of you.
In the interim, stop kicking yourself over any lingering regrets over the money choices you made during your college years. You have time to fix things. Consider some general advice that will help you get on the right path.
It starts with living frugally for starters and keeping your total debt payments to under 10 percent of your income (to insure they don’t affect your eventual ability to qualify for a mortgage). That also means paying your credit card off each month. And that new car? It’s a sign of a spender, not of someone with money.
Instead of getting used to spending on stuff that’s incidental to your priorities, start investing 10 percent to 20 percent of your income for your longer term “financial freedom.” Focus on equities.
And for your eventual home ownership? Saving for a down payment – ideally 20 percent – is where the biggest chunk of your money should go. A 20 percent down payment helps you avoid CMHC fees. You can save $25,000 in your RRSP retirement account for a home. Here’s a precautionary note, though. Don’t buy too soon. Wait until your career settles down and you can live in it for at least five years. You’ll offset the risk of losing money if you have to move for your job.
And remember. Paying off your student loans is an admirable goal. But not to the exclusion of other priorities that will have a major long-term impact on your life.