Q. I’m a 23-year-old who just graduated with a Masters degree and I have $30,000 in student debt ($20,000 provincial, $10,000 federal). I also just got a job with an annual salary of roughly $60,000. My question is what is the best way to invest my money (index mutual fund, stocks, online Robo-advisor) so that I can still pay off my loan but also save for the future (i.e. buying a house/condo, getting married, etc.). Thank you!
A. Jake, first, I’d like to offer congratulations. Kudos for wanting to reach for these goals and milestones, especially since you are quite young, have just begun your career and are still several years away from big mortgage payments and retirement.
One key thing to note is whether you are living with your parents or on your own. It makes a difference because paying for rent, food, and other shelter expenditures can consume a lot of financial resources. That being said, in either scenario, debt reduction is the best form of investment within either scenario.
If you reduce your debt, you have a guaranteed rate of return equal to the rate of interest on the loan. So debt reduction is one of the best investment decisions you can make. With every dollar of debt you eliminate, you will free up future funds for saving and investing in investments that can appreciate, grow and earn income over time. Debt reduction is also the only investment with guaranteed returns—another bonus.
Here are some tips to grow your money fast depending on your living situation:
- If you are living rent-free with parents, attack the debt with an absolute vengeance. Allocate $1,000 a month or even $1,500 or $2,000. Doing this could make you debt free in just two years.
- If you are living on your own (or with a roommate), paying for rent, groceries and other non-discretionary living expenditures etc, other options will be necessary. For instance, with this scenario, the realistic debt repayment may be closer to $500 or $600 a month, meaning it could take closer to five years to pay off the debt completely,
Rather than invest immediately, it may be prudent to focus your attention to reducing debt. Make debt repayment a priority. This is an effective way to focus your goals.
Once you have successfully repaid some of this student loan, you’ll likely feel a sense of empowerment. It is at this point in time that you might start to invest, using the money that was going towards debt repayment and instead, putting it towards investment products like TFSAs or RRSPs. Focus your time on becoming more financially literate, both about general finances and investment literacy. There are lots of websites and reading resources available. Some to consider include books such as The Wealthy Barber by David Chilton, Wealthing like Rabbits by Robert Brown and The Little Book of Common Sense Investing by John C. Bogle, as well as investing websites like CanadianCouchPotato.com.
One thing to also note: as your salary increases, up your monthly student debt payments. Or, if you get chunks of money throughout the year in the form of tax refunds or company bonuses, be diligent to apply those sums to the debt to repay it quickly. Student loans are very flexible this way and this option is often overlooked. Plus, getting rid of your debt will increase your Credit Score as well as your Credit rating—two huge benefits when it comes time to borrow money for a business or take out a mortgage on your first home.
Of course, if you want to “do both” and attack the debt as well as contribute to an investment portfolio, then keep the monthly investment amount small—maybe $100 a month. Yes, the amount is small to begin with if you’re still paying down the debt but the actual process and commitment to an investment account is the crucial factor in the equation.
Direct deposit from your paycheque into your Investments will provide a “pay yourself first” approach. If you put this into place for yourself now—even a small amount—this autopilot approach will reap big future rewards. consider starting with a TFSA. They are more flexible investment vehicles for younger investors and those with lower incomes do not reap the full benefits of the tax refunds made through RRSPs. It makes sense to wait until you’re in a higher tax-bracket—say $75,000 or more annually—before using RRSPs.
Within the TFSA, you have several options. You can invest with a robo-advisor such as Wealth Simple or Nest Wealth, or through the online brokerage at your financial institution. Consider using Exchange Traded Funds (ETFs) as your first investments, perhaps moving on to picking stocks when you’ve read more about investing.
Heather Franklin is a fee-for-service financial planner in Toronto
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