Understanding Your Potential for Financial Independence
This lengthy strike has given me ample time to ruminate over the dreadful uncertainty of my future. As someone with anxiety, I understand how unsettling it can be to even begin thinking about “what’s next” when it’s time to leave our cozy institutional nest. To top it off, having to face debt from student loans isn’t exactly tea and biscuits. Thankfully, my incessant contemplations have propelled me to improve my financial literacy and I’d like to share my findings with you to spread the financial awareness!
1. The TFSA (AKA Making Money Without Doing Anything)
Behold the beauty of the TFSA (Tax-Free Savings Account). This particular “savings” account is regarded as an investment account that will not tax you for withdrawing money at any given time. Back in 2009, the Harper government made all Canadians aged 18 and above eligible to not only deposit cash into this type of account, but also to use it as a basket to purchase and hold mutual funds, stocks, bonds and ETFs! Your investments will continuously grow from interest and you will never have to pay taxes on the money you make inside a TFSA. To paint a clearer picture, if you put $1000 in a TFSA back in January and the interest is 1.1%, then you would earn $11 by the end of this year, without doing anything. Of course, as your contributions increase, you start to reap greater rewards.
That said, with TFSAs, it’s important that you don’t go over the contribution limit, as this can impose serious tax penalties. This limit depends on your age and how much money is already invested into the account. For example, if you’re turning 18 this year and you haven’t deposited any money into a TFSA, then your contribution limit is $5500. At 19, assuming you haven’t made any contributions, your contribution room will double to $11,000, meaning you will have even more room if you happen to take out money from the TFSA this year. So be sure to stop in at your local bank branch to take advantage of this incredible opportunity to build wealth over your lifetime!
2. The Hard Truth About Student Debt
I know we all want to sweep this topic under the rug, but the truth is, it’s a difficult reality most of us will face without parental aide. It’s fairly well-known that students who rely on OSAP are given a non-payment grace period after they “graduate”, but this is where the broken telephone begins. Unfortunately, not everyone is aware that the Canada Student Loan interest will accumulate every day during this grace period. This heaping loan interest currently sits at almost 6% (prime rate + 2.5%) and it will be applied starting May 1st of the year you are no longer returning to school. In addition, the Federal Student Loan interest, which sits at about 4% (prime rate + 1%), will also be applied to your loans after six months. Paying this combined diabolical interest will hinder you from achieving your dreams, so it’s in your best interest to start making payments ASAP (if you’re graduating this year). I strongly encourage you to get rid of your debt as quickly as possible to regain your financial freedom!
3. A Mini-Introduction to Index Investing
Investing in the stock market is an intimidating venture for most, especially for those who are pretty conservative about their earnings (like me). For absolute beginners, make the most rational decision possible: invest in low-cost index funds. These funds are a collection of investments consisting of a wide range of stocks and bonds that represent a specific market (S&P/TSX Composite Index or Canadian Bond Market Index). They allow you to have a diversified investment portfolio, which is vital to your financial well-being since diversification protects you from extreme losses in a volatile market. This works on the basis that if one stock in the fund isn’t doing well, you have nine other stocks to keep you afloat and perhaps even still allow you to make modest gains.
One great advantage of this type of fund is its stress-free convenience because a fund manager will oversee your portfolio and prevent you from making long-term mistakes. That said, be wary of management fees (also known as MER). Generally speaking, this is a small issue for novice investors but it’s still worthwhile to point out. And, if you’re confident in your abilities and can make emotionally stable decisions, then you might want to further investigate managing your own portfolio. A word to the wise: index funds aren’t just for novices. Most money managers and even multi-billion dollar hedge funds have trouble consistently beating the market. Investing a portion of your paycheck every month in a reputable index fund (mutual fund or ETF) with a good dividend can build significant wealth over several decades thanks to the power of compound interest.