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Financial planning for young adults


With pension cutbacks and rising life expectancies, it's increasingly vital that young adults get an early start on the journey of sound financial planning. A lack of focus or missteps at this stage can unnecessarily delay long-term goals and financial well-being.

Here are five strategies to help you (or a young adult in your life) get off on the right foot:

1.     Create a cash flow statement and budget - Invest time upfront to track income and spending until you know where your money is coming from and where it's going, including how much is going out in tax and other payroll deductions. Create a budget that reconciles spending with income. Learn basic tax principles and start to calculate purchases in terms of pre-tax dollars (or hours of work) required.

2.     Avoid credit - Unless you are an exceptionally disciplined person, avoid buying consumer goods on credit (a.k.a. "bad" credit as opposed to "good" credit used to make investments). Credit cards charge close to 30% interest - that's $300 on a $1,000 balance over a year. By using a debit card or paying cash, you'll dodge a lot of the anguish many over-spenders experience in their lives.

3.     Pay yourself first - This tried and true strategy means arranging to have part of your income automatically directed to a savings account before it can reach your wallet. Begin small and increase the dollar amount over time until you're investing 10 to 15 per cent of your income. Our team can suggest a number of ways of implementing this strategy in tandem with a Tax-Free Savings Account - a must-have for adults of any age. 

4.     Plan for retirement - Even if you don't owe tax, it's important that you file tax returns to report earned income and create RRSP contribution room to use in the future. RRSPs offer both tax deductions and tax deferral. Since withdrawals are heavily taxed, investors are motivated to leave funds intact until retirement. 

5.     Disability insurance - Prepare for the possibility of a disability that could leave you unable to support yourself. With increased job mobility, we recommend you obtain a private policy to provide ongoing protection in between employers.

A final piece of advice is not to take any financial advice - except from a professional. A hot tip is likely to disappoint. Instead, find excitement in other areas of your life and lean on a professional advisor for prudent advice that will guide you to financial security.

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