Planning for your financial security
As recent graduates tackle the current recession, it is as important as ever to plan and secure their financial future against uncertainties.
In an interview between SAIT graduates, Ken Wu (Business Administration '04), a Senior Financial Planner at TD Wealth Financial Planning, and writer Kaj Bhatia (Journalism '20), they discussed some strategies for new grads to manage their current and future finances.
KB: How important is the role of a financial planner in our lives?
KW: By talking to a financial planner, you're taking the first step in developing a strategy to reach your financial goals in different situations. Having a planner also provides an opportunity to regularly review your goals, so that you can adjust your approach or take corrective action when needed.
Financial planners can help you with some of life's uncertainties and developments. For example, if you were to lose your income for a few months due to COVID-19, they would suggest an approach to get you back on track. Or, if the opposite happens and you have some extra money, they can help you save for the future. Open communication with a planner is crucial, as they work on a case-by-case basis to navigate each client's unique financial transitions and stages of life.
KB: We’ve all realized the importance of emergency funding or savings during these uncertain times. What are some key investments that can help recent graduates protect their financial future?
KW: I always suggest people pay themselves first by saving some of their income from each paycheque. Many banks can set up an automatic transfer of funds, so there's no need for a reminder. No amount is too small. Another best practice is having an accessible emergency fund. The rule of thumb suggested by the Canadian government is to have enough cash on hand to cover at least three to six months of expenses.
Next, it’s a good idea to talk to a planner to discuss your short-term and long-term financial goals. You should discuss topics about upcoming life developments. Will you be buying a new car soon? Will you need a mortgage for a home? How will you pay down student debt? Are you getting married? Are you planning for retirement? These are all important life changes that a planner can help you prepare for financially. Based on your answers, the planner will develop a diversified portfolio of different investment types to help meet your specific goals.
KB: How does one build and maintain a good credit history?
KW: For students or recent graduates, I often recommend having a credit card that you use and pay off each month. A good credit history helps you get financing in the future for larger purchases like a car or a house. You'll also find that many banks have credit cards specifically developed for students that offer different perks.
It's important not to carry a balance on your credit card – pay it off each month! This is the best way to establish a strong credit score during your school years or immediately afterwards. And this is a mantra you should adopt whenever you borrow money in the future.
KB: Is it recommended people pay their bills through credit cards? Does it help build your credit history?
KW: It's really a personal preference. Some cards have points programs or cashback offers that can help by reducing other expenses. Always ensure that you have the cash to pay off your bill when it comes because carrying a high balance on your card can have a negative impact on your credit. What you want is a regular cadence of purchases on your credit card and an equally regular habit of paying it off each month.
KB: As an international student and now graduate trying to understand the Canadian tax system, I’ve always been curious about the Tax-Free Savings Account (TFSA) and how I can maximize my savings.
KW: There are a few key differences between a TFSA and a Registered Retirement Savings Plan (RRSP). Both can help you save money, but they're structured very differently and it's important to know the differences and I encourage you to speak to a financial planner when deciding between the two.
Generally, an RRSP is primarily designed to help Canadians save for retirement, but funds can be accessed earlier in some situations, like through the Home Buyers' Plan or the Lifelong Learning Plan, subject to eligibility and conditions. Contributions to an RRSP are made pre-tax and can be used to reduce your income, which in turn reduces the amount of tax that you pay. Down the road, withdrawals from an RRSP are taxed. The idea with an RRSP is that you may be in a lower income bracket when you retire, meaning you would pay less tax on those dollars than you would have when you earned them.
A TFSA is designed to help you save money for any goal, including big-ticket items like a new home or vehicle, travel plans, a wedding, or longer-term planning for retirement. Another difference is that TFSA contributions are made after-tax, will not reduce your income and therefore will not impact your income tax; however, your contributions can grow tax-free. Withdrawals from a TFSA are not taxed, as you already paid tax on these dollars.
KB: What would you recommend a recent grad trying to allocate or plan out their finances, especially when paying bills, debts or student loans?
KW: Budgeting is key and can easily be done with tools available to you. For TD bank account holders, the TD MySpend app allows you to track where your money goes. It keeps track of all your purchases, so you can easily see where you are spending money. It's also handy because it will alert you when there's activity on your bank account.
Another option is something as simple as recording your spending in a spreadsheet that keeps track of your monthly totals. That way you can compare it against your income from your job and plan for bigger payments, such as a credit card payment, car loan or mortgage.
I recommend that people start saving their money early – first for an emergency fund, but then for bigger purchases and even retirement. Take the time to set up an automatic transfer of funds, so you'll be putting aside some cash off each paycheque.
Finally, I'd also suggest paying down any debt you might have, starting with the highest interest rate product first. For example, carrying a balance on a credit card not only hurts your credit history, but you also end up spending a lot more money paying it off over a longer term. And this is money you could have used for other purchases or expenses. It's also a good idea to pay down your student loans as quickly as you can afford to help avoid interest charges.
KB: Some people use different types of accounts in multiple bank accounts to balance their bills. Does it help?
KW: In this case, it's more important to be aware of any monthly fees or dollar requirements for your bank accounts. These can cost you money. Make sure you fully understand these requirements when opening a new account.
Generally, we recommend setting up a separate account to save money or budget for an occasion. Then, if you set up an automatic transfer, it's a great way to start on that emergency fund or for a contribution to a TFSA or RRSP.
KB: The recent pandemic has taught us that time is fleeting. How can grads ensure financial stability and support for their loved ones in unfortunate circumstances?
KW: It's often a tough topic to discuss, but you can help alleviate the stress on family by considering purchasing life insurance, critical illness insurance or disability insurance to prepare family and dependents for uncertain times. You'll never know when you might need these products and people can procrastinate on purchasing them. For graduating students, it's time to plan for these major life events and to help protect your financial security, so you're prepared no matter what happens down the road.
Ken Wu works closely with clients to understand their current financial circumstances and the goals that are most important to them. Whether planning for retirement or starting a new business, Wu helps develop a financial plan that balances life today with their goals for the future.
Wu holds a Business Administration diploma from SAIT and a Bachelor of Management degree in Finance from the University of Lethbridge. Inspired by his instructor at SAIT to work at TD as a Senior Financial Planner, Wu believes the program gave him a solid foundation towards finance to help accelerate his career. He is also a Certified Financial Planner (CFP®) by the Financial Planning Standards Council.
Disclosure: The TD Insurance Meloche Monnex home and automobile insurance program for Professionals and Alumni is underwritten by Security National Insurance Company and distributed by Meloche Monnex Insurance and Financial Services Inc. in Québec, and TD Insurance Direct Agency Inc. in the rest of Canada.
This article is proudly supported by SAIT affinity program partner TD Insurance Meloche Monnex.