Today I’m going to start a new mini-series that looks at some specific investing suggestions and advice for people in different stages of their lives and careers. We’ll start with folks in their 20s, and move upward from there. Whether you’re in your 20s or not though, there are some useful tips and reminders in here for a wide variety of people. Read on for five tips that are especially useful if you’re in your 20s!
Tip #1: Start saving regularly, in small amounts.
I’ve written in the past about the power of compound interest, and saving while you’re young is the very best way to take advantage of that. You may not be able to save a ton each month early on in your career, but the amount you save is less important than the habit of saving.
By starting small, putting even $50 away each paycheque, you begin to build the habit of saving for your retirement. It feels good to watch your savings grow, and if you’re already in the habit by the time you start to earn more income, saving that extra money will feel really, really easy.
Tip #2: Track your spending each month.
The best way to find money to save each month is by understanding where you’re spending each month. Most banks have features within their app that allows you to track your spending in general terms, but you can take it a step further and download a budgeting app to really get on top of things.
Once you start tracking your spending, you’d be amazed at where your money goes. We often spend more than we think on dining out (though it looks more like takeout these days – thanks COVID), and there’s usually some wiggle room to free up some funds to put toward savings.
Tip #3: Take advantage of your RRSP and TFSA.
If you live in Canada, then your RRSP and TFSA are you two most valuable allies in saving for retirement. I’ve got a separate post that gets into the details on how they work, but for now what you need to understand is that both of them provide benefits that allow you to pay less tax on your investments.
Read up on them, and then start taking advantage of them. Unless you’re incredibly privileged and have maxed them out, all of your early retirement savings should be going into one or both of these two buckets.
Tip #4: Invest in something that beats inflation.
I’ve said it before, but it’s so damn important that I’ll say it again here: nobody ever retired by investing in GICs. Let me ask you this: if your investment vehicle pays you 2% a year, and inflation is 2% a year, then how much has your purchasing power grown by?
Zilch, that’s how much.
Zero, zip, nada, niente, nothing. You need your investments to work way harder than nothing if you want to retire one day. When you’re in your 20s, don’t be afraid to invest in more aggressive investment vehicles.
I’d suggest a stock index fund like the TD E-Series Canadian Index Fund to start out. It’ll allow you to invest in every company listed on the TSX, benefitting from the collective long-term gains. While it may seem a little scary to watch your investments go up and down in value in the short term, your biggest ally is time. Over periods longer than 10 years, the stock index is almost always in the green, and its average annual return is over 9% (it was 9.3% between 1960 and 2018), including dividends.
That’s a hell of a lot better than the “generous” 2% GICs are paying right now.
Tip #5: Take advantage of company matched-savings plans.
If you’re lucky enough to work for a company that offers to match your savings with its own dollars, then do it. See how I used all the font formatting features there? That’s because it’s important; there’s no money like free money.
Say your company puts in $0.50 for every dollar you invest. That means that, when you invest $1, you immediately have $1.50 in the bank. That’s an instantaneous 50% return on investment. I don’t know of any legal investment vehicle that can do that for you, so you’d have to be crazy not to take advantage of it!
If you’re ready to start following Tip #1 and putting money away, and this option is available to you, start here, bottom line.
Wrapping it Up
Everyone wants to retire one day. Well, almost everyone… looking at you, you crazy workaholics out there. Ok, most of us want to retire one day. And there’s just no better way to set yourself up to do that than to start working toward that goal while you’re in your 20s. You have the power of time and compound interest working for you, and by building up a small nest egg and the right habits now, you’ll make it way easier on yourself later on.
