Family Finance

The first in a series looking at investing in your 20s, 30s, 40s and 50s

What if you start saving in your 20s?

There are many competing financial priorities, so it’s hard to save money during one’s 20s. But even a small, monthly amount helps. The chart below shows how important it is to start investing early, and to illustrate the point we’ve created two characters: Early Elaine and Late Larry – each earns 8% annually on their investments.*

Starting when she was 25, Elaine put $4,000 into an RRSP each January until she was 36, a total of $48,000. Larry on the other hand didn’t begin investing until he was 37. He put $4,000 into an RRSP each January over the next 35 years, contributing a total of $140,000.

Let’s look at the results. When Elaine turns 71 her account would be worth 63% more than Larry’s. Why? The answer is simple: Even though she contributed far less, her money had more time to compound and grow. And that’s precisely why you should start investing when you’re young.

Click here to learn more about Elaine and Larry

Take a lesson from Elaine and make saving automatic

What you don’t see, you won’t miss – so save money by opening a pre-authorized savings account. This allows money to be automatically deducted from your bank account and shifted to your investment or savings account.

A good rule of thumb is to save 10% of your income, but talk to your financial advisor to make sure you develop a realistic plan.

If your employer has a program to match your contributions (an employer-sponsored group RRSP, pension plan or other savings program) be sure to join. It’s free money, and since you won’t see it you can’t spend it, so it will build up quickly.

Yes you can find money to save

Most people have a general idea where their money goes, whether it’s the monthly phone tab, rent, or food. So the best way to find money to save is to add up all your expenses and look for things you can do without.

The next step is to create a budget – a plan that shows you how much money you expect to spend and from that, how much money you can save. If you have the discipline and motivation to keep saving, your money will add up quickly. For more information on investing in your 20s click here and go to www.burnrate.ca to try out our investing and budgeting calculators.

TFSAs are more flexible than RRSPs

Tax-Free Savings Accounts are great for young investors. If you’re 18 or older you can now put $5,000 into a TFSA annually. Unlike RRSPs you won’t be taxed on the money when it is withdrawn. In other words your investments grow tax-free and you can take the money out at anytime for any purpose. To learn more about TFSAs go to www.mackenziefinancial.com/tfsa.

* The information contained herein is based on certain assumptions for illustration purposes only and does not purport to forecast or guarantee future fund values or returns. Depending on the contribution amounts and rates of return used in this type of example, the difference in the market value at age 71 may be more or less pronounced. However, the pattern of a higher market value for the early contributor always holds.