Balancing act: Young professional struggling with student debt seeks to accumulate wealth

Opinion

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This article was published 17/01/2015 (3910 days ago), so information in it may no longer be current.

Hannah is two years out of university and still feels like she’s spinning her wheels financially.

Working as a health-care professional, earning almost $35,000 before taxes a year, the 30-something Winnipegger owes more than $20,000, mostly for student loans.

“I’m feeling like it’s hard to get ahead. I’m maintaining, but I’m not improving. I’m relying on one-time payments to get ahead,” she says. “Thankfully, Manitoba will pay back a large portion of money spent on tuition.”

While the Manitoba tuition fee income rebate provides a big tax refund allowing Hannah to pay down debt in large chunks annually, it’s her line of credit — $5,770 — that has proven to be a pesky adversary.

She admits she is often her own worst enemy.

“It feels like some months I go over my spending, and that’s the frustrating piece,” she says. “Last month, I forgot entirely about my annual professional fee, so here’s another $225 that I didn’t budget for and ‘Ugghhh!’ I’m digging into the credit line again.”

When that happens, Hannah picks up part-time work, earning about $170 a month.

Yet Hannah does have some savings, about $10,000 in an RRSP. She’s even contributing to it, but only as part of a repayment plan for the $8,000 she withdrew using the Lifelong Learning Plan to help pay for school.

Frankly, she says retirement is the least of her concerns. Balancing her budget is the priority so she can eliminate her debt and start saving for the future.

“I don’t even know if I’d want to buy a house, but I’d like to have some savings so that conversation would be a possibility,” she says. “I’d at least like to be able to buy a car — not a new one, just a used one.”

Senior financial adviser Rich Hammond with Scotiabank in Winnipeg says Hannah needs a step-by-step approach to getting out of the red and into the black.

Although Hannah has been doing some rough budgeting, it’s obvious she has room to improve if she relies on her line of credit to deal with cost overruns. Moreover, adding up her total monthly expenses reveals she is spending about $2,251 while earning about $2,100 from full-time work.

So without part-time work, Hannah would be running a monthly deficit.

Yet Hammond says she likely can cut costs to balance her budget and find additional money for savings and debt.

The key is attention to detail, and online budget applications can certainly help. Some do cost money, but many are free, such as Scotiabank’s Money Finder.

“This will make it easier for her to categorize expenses while providing structure and guidance.”

Once she has a detailed list of monthly expenses, Hannah can review it and make adjustments.

“When reviewing ways to cut expenses, she should look at discretionary expenses first,” she says. “In her case, a starting point such as entertainment and dining may be a way to find more money for savings and debt.”

To that end, Hannah spends about $250 a month on entertainment. If she could cut this spending by one-third or even better — by half — this money could be used for more important goals.

Yet, while Hannah may be tempted to put all newfound savings against debt, Hammond says she should have a two-pronged approach to building financial stability.

The best way to do this is starting a modest but regular, automatic savings plan while marginally increasing debt payments on her line of credit.

She could also set up separate accounts for each savings goal to ensure she sticks with her plan.

“For example, open a savings account each for vacation, car purchase, and for emergencies or unexpected expenses,” he says, adding Hannah could set up automatic contributions to align with paydays.

“Regardless of how small the contribution is, consistently putting away even $25 per paycheque will give her a head start on savings, netting $650 in a year.”

And Hannah should be able to find additional cash. Her entertainment budget aside, Hannah says she also spends about $120 a month on “coffees, music downloads, chocolate, cleaning supplies and personal hygiene.”

Cutting these by $50 a month would allow her to start saving for one or two goals.

No doubt it will be a tough slog at first.

Yet as she progresses on her career path, Hannah will likely see wage increases. Instead of spending more with this additional cash flow, however, she should divert it to debt and savings.

After a few years, Hannah must make sure some of those increases start going toward long-term goals such as retirement.

“These can make a big difference in the long run,” Hammond says.

“For example, increasing her RRSP contribution each year by five per cent will exponentially increase her savings over the long term without having a large impact on her day-to-day budget.”

Another benefit is the money can be withdrawn for a down payment on a home through the Homebuyers’ Plan, which allows withdrawals of up to $25,000 from an RRSP without tax implications.

Of course, at this point, buying a home isn’t on the radar and even if it were, it’s a few years away because Hannah needs more time to save and reduce debt.

In the meantime, she needs to become a dedicated budgeter, reviewing her financial situation monthly to ensure she is moving incrementally in the right direction.

“Even a slight increase in savings and reduction in debt are victories,” Hammond says.

And it actually shouldn’t be long before Hannah sees progress because her debt situation isn’t overwhelming.

But it is the kind that becomes comfortable and easy to forget while it slowly grows into a major problem.

So the fact Hannah realizes she needs to take action today bodes well for her future.

“By starting some of these strategies, she will have a great head start as she moves up with her career, so overall, Hannah is actually in great shape.”

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