Hey there, time traveller!
This article was published 14/9/2012 (1473 days ago), so information in it may no longer be current.
Julia finished university with high hopes of changing the world.
Today, she's happy to earn a decent living. After a couple of years working in the non-profit sector, the university graduate decided to take a new career path.
"I was busting my ass for these jobs that I didn't really love, or I could go to this other job that I enjoy and make the same money," says Julia, in her late 20s.
Earning about $33,000, with the promise of pay increases, Julia now wants to start saving and paying down debt.
She's already set aside about $3,000 in RRSPs, much of it sitting in a low-interest savings account until she can figure out what to do with her money.
And she hasn't made a contribution since starting her new job, which has a pension plan she can soon join.
Julia also carries student debt. She owes about $2,800 on a line of credit and $10,000 to her parents, interest-free.
"Compared to friends my age, I don't have a ton of debt, but I also don't know what to do to get out of debt more quickly and the best way to save for the future."
Saving for a down payment on a home and retirement are long-term goals Julia says she can hardly envision at this stage.
Besides, she has more pressing needs.
"My car will probably die within the next year or two, so I have to start saving up for that," she says.
But she also knows there's no time like the present to lay the foundation for a strong financial future.
"I just want to feel like I'm set up for the future -- that I'm comfortable."
Assiniboine Credit Union account manager Sara Kushnir says Julia is at a crossroads and seems to have chosen the right path to financial freedom.
A good first step is she has a balanced budget.
Even after Kushnir tacked on a few expenses Julia may have overlooked, such as car insurance, interest payments and $100 for clothes, she still has $442 left over every month.
"This may not sound like a great deal, but if we allocate these funds in the right way, we can have her personal net worth grow over time," Kushnir says.
And Julia has just enough money to address all of her financial priorities.
First and foremost is paying down debt.
Paying $80 a month on her $2,781 line of credit, she will have paid off the balance in about three years, based on a five per cent interest rate. She also has enough to tackle the loan from her parents at the same time -- only it will take a little longer.
"In most cases, I would recommend debt to be paid back over a period of three years; however, this is student debt, which was an investment in her career and future," Kushnir says. "This is considered good debt, but even the good debt needs to be looked after over time."
Kushnir says the average time to pay down student loans is five to seven years.
"I would recommend a monthly payment of $167 to have the loan paid back over five years."
In the meantime, Julia can start contributing $75 a month to her RRSP. By age 65, she will have saved $22,452 in today's dollars or $68,476 without the effects of inflation. This is based on an average annual return of three per cent.
That sum definitely won't be enough to retire on, so she will need to consider other investments than GICs or a savings account.
One suitable option for her may be socially responsible investment mutual funds. Given her experience working for non-profit organizations, investment choices that take into account social and environmental issues may be a good fit for her.
Overall, however, she will need to save more to build a bigger retirement nest egg.
One way to do that is to increase contributions every time she gets a raise at work.
"If she receives a two per cent raise, her savings should also be increased by two per cent," Kushnir says. "Once a year she will also want to increase her monthly contributions to keep up with inflation."
That's about a two per cent annual increase as well.
Once she joins the company pension plan if she has to choose between RRSP and pension contributions, she should choose the latter because it's likely her employer will match what she puts into the plan.
"If there's a matching program, we would want to reallocate as much of the $75 as we could to the work plan."
Besides planning for retirement, Julia needs to save for the short term, too.
One top priority is an emergency fund, for which she has room in her budget.
"A $50 monthly amount can be set aside in the new emergency savings and before she knows it, there will be a sum of money which she can rely on in a pinch rather than always going for the credit card."
With the remaining $150 of monthly surplus, she can start a tax-free savings account (TFSA), investing the money in a high-interest savings account to save for big-ticket items.
In two years, she will have saved $3,600 -- enough for a down payment on a car.
For a $19,000 vehicle, with a six per cent loan, she would have a $255 monthly payment.
"At her current income, she will need to cancel most savings plans in order to be able to afford the payment," Kushnir says.
The bottom line is Julia will need to increase her top line (revenues) to fit that payment into her budget.
Yet she does have time on her side, and she's got a good education -- the right mix for successfully landing higher-paying positions in the future.
"This highlights the wonderful benefits of financial planning, and I'm confident Julia can achieve her dreams."