Financial Focus In Your 20s – Part 4
Posted by Gail | Filed under Investing, Money Management, Taxes
There’s a lot to think about when it comes to creating a firm financial foundation, isn’t there? Don’t get overwhelmed. Each of these steps is pretty straightforward, but you need to make them all dovetail to really work. And the plan will only work if on a day-to-day basis you do the things to keep the plan on track.
7. Keep your monthly banking fees in check. Most people don’t pay much attention to their bank costs. If you need $20 to pay the bar tab, you whip across the street to the machine and pull a $20. Did you see the $1.50 fee the machine just charged you? How about the $1.50 your own bank is going to charge for having used another bank’s machine? There ya go, you just paid $3 in fees – that’s a 15% fee — on a $20 withdrawal because you’re not paying attention.
Quit using the banking machine like a wallet. With a little planning, and some self control, you should be able to make a withdrawal from the machine twice a month (or once a week at the most) to cover your cash needs all month. If you’re going to the machine more often than that, it’s probably because you’re working without a plan. And you know what they say: Fail to plan; plan to fail!
You can reduce your bank charges – or eliminate them completely – by shopping around. Some banks have no-fee accounts. Some have banking packages that significantly reduce how much you have to pay each month providing you follow the rules and stay within the transaction limits.
8. Start learning about investing. You may not be ready to leap into the world of investing just yet, but there’s no reason why you can’t start reading up and developing on understanding so that when you are ready you’re also informed.
Stocks and bonds have historically tended to earn higher rates of return for investors over long periods of time. The downside is that they’re riskier than things like GICs or term deposits. Only you can decide how much risk you’re willing to take for the chance to earn higher returns over time.
When you do decide to launch into the market, rather than trying to pick the specific stock or bond (or pay the fees associated with many mutual funds), look at buying the index instead. You can get the diversification you’re looking for along with the exposure to the types of stocks or bonds you’re most interested in. If anything in the previous sentence sounded like gobbledegook to you, it’s because you still have to learn the basics. Start reading!
9. Think about owning. At some point in your twenties may start to feel that you should buy a home. But deciding what you want, how much you can afford, and how you’ll finance this big step takes a lot of planning. There’s far more to it than simply comparing your monthly rent with the monthly mortgage payments you’d make as a home owner.
Lots of people who think they are ready to buy a home have difficulty coming up with a downpayment. Hey, if you can’t get focused enough to save a downpayment it may be that you aren’t ready for home ownership. Or maybe you just don’t make enough money yet. Or you’ve got too many expenses, including a whopping amount of consumer debt. Jumping into home ownership without a sound financial foundation means you’re likely to feel strapped and become resentful because you no long have any money for fun. Look before you leap.
10. Get smart about taxes. Nobody likes paying taxes and the best way to make sure you’re paying the least amount necessary is to become familiar with the rules and regs. What tax deductions or credits are you eligible for? What expenses can you claim against your taxes? What other ways can you reduce your taxable income? Get yourself a copy of the tax guide for the current year. Stick it in the bathroom and every time you sit for a few minutes, read a paragraph or two. Keep a pen handy to underline what may pertain to you. In just a few weeks you’ll have a good sense of what’s what. And it will have taken no more time than taking a good… well, you get my drift.
Okay, there are the ten steps to getting your financial foundation on track in your twenties. Do these things and you’ll be well on your way to coping with what life throws at you in your thirties and beyond.
March 18, 2010 at 6:54 am
for stuff like tax matters, an accountant is worth their weight in gold. there may be no sense to learn tax law yourself. I would focus on advancing your career rather than worrying about laws that change from year to year.
March 18, 2010 at 7:04 am
One of my cousing will be starting college soon; for xmas I gave her a book about how to handle money. I hope she’ll watch your show or read your book and learn how to do things right from the beginning!
March 18, 2010 at 7:12 am
No way am I using an accountant for my taxes!
Unless you have a business of your own or you’re a dual citizen with a country that requires double filing (like the US), I see very little reason to use an accountant to do your taxes. We have tons of free or relatively cheap programs available in Canada to assist you with filing them on your own if you want to.
My husband uses an accountant for his taxes every year since he’s a dual citizen. The fees take up virtually all of even the most generous refunds (1600 bucks!) and often we owe them money.
I’ve used both TurboTax and QuickTax and they both work fine. QuickTax is my preference, and since they’re back up to allowing 8 people to file, I split it with some friends and family members and it costs us less than 10 bucks each. Super easy.
I realize that not every accountant charges what most accoutnants charge for a cross-border tax return. That said, you’d be hard pressed to beat 10 bucks. Or even the original QuickTax charge of 40.
I did an experiment once a few years ago. I took my tax documents to two different H&R Blocks, one regular accountant, and then put them through QuickTax myself. Both H&R Blocks missed significant deductions, the regular accountant missed one and charged a pretty penny for it, and QuickTax covered them all.
I’m not a QuickTax rep by any means, I just hate how we seem to have made taxes out to be this “impossible” task, not understandable by mere mortals…
March 18, 2010 at 7:30 am
We use Genu Tax software. Purchase once and get a free update every year. This year I compared them with quicktax online and they came up with exactly the same result. The down side is it’s not as pretty and doesn’t have the RRSP maximizer built in….I can deal with that.
Don’t work for Genu either, but I do like the free yearly update.
March 18, 2010 at 8:16 am
Thank you for the wonderful series Gail!
I have an almost 21 year old daughter who has ventured out on her own, sharing a small apartment with roommates to keep her expenses down. After months of hard work, she will be starting a new position within the same company full time.
While using your methods to tackle our own debt which almost made us go bankrupt, she has been watching and learning. We’ve talked with her plenty of times to show her where we made our mistakes, hoping that she would avoid them herself.
She’s had some bumps along the way in the last year and a half (a job loss with no Emergency fund) and had learned the importance of looking after her own financial well-being. She’s got an appointment at her bank tomorrow to open a TFSA savings account.
Hopefully with some guidance she can avoid some serious financial blunders. With your permission, I’d like to print out this series and give it to her.
March 18, 2010 at 8:24 am
Although I am nearing my 30th birthday, I loved this series. It all makes sense and is still very useful info for all ages. I wish I had been taught about financial matters when I was much younger but I guess it is better late than never.
March 18, 2010 at 8:50 am
RE: hiring an accountant to do your taxes…
Unless you are self-employed, or have other complicating factors, like being a dual citizen (my dad goes through that, what a nightmare, and it’s hard to find an accountant that will even attempt his taxes), most people should be able to do their taxes on their own. Quick Tax absolutely simplifies the process, and the RRSP calculator works great for us, as we put into RRSP’s what we would get back in a refund (my husband’s income varies from year to year, and this system works out well for us).
We paid to have an accountant do our taxes one year. They missed the deadline (lucky we didn’t owe), and they completely forgot to put in our union dues. They ended up refunding our money, but we learned that it seems that we aren’t missing any additional deductions (always the hope, right?) when we are doing it ourselves.
March 18, 2010 at 8:59 am
Oh Tax Season! I need to be more involved in my taxes, as my husband is the one that sits down and does them. He LOVES to do them… to him, it is like a puzzle – trying to figure out how we can get the most back from the government. Heck, he gets together with this father and they have a small party – both doing them together, comparing and the like.
As for investing – that has me scared to death. My bank talked to me about it one time – and I took this little test to tell me how high of a risk I would be comfortable taking with my investments, then never acted on it because the lady was pressuring me to giver her $5000 to invest with, so that I would have no bank fees! It was funny, as honestly, I believe she was trying to save me bank fees, but failed to see that by giving her $5000 wasn’t going to help my situation at that current moment. She seemed kind of sketchy – wasn’t able to really explain anything well enough. Honestly, I believe I need to do some research… I just have to find some dependable books/websites to get me started. Any suggestions?
March 18, 2010 at 9:27 am
I have always done my own taxes, even though I have moved from a really simple return, to owning a part-time business and full-time employment.
These are the reasons why I do it:
1) The government actually double-checks all your work, same as an accountant will. Often I get a little note with my return, but I’ve never been off more than $100.00
2) I have found that it gives me a real “hands on” understanding of what I am paying in taxes, and what kind of deductions or less tax I could be paying for the following year. Future tax planning…
3) I do it the old fashioned, calculator and pen way — but a friend did once do an electronic quick tax for me, and it was amazingly simple.
4) Unless I know someone to be intelligent, honest and ethical, I do not want them touching anything that has financial/legal remifications for me. I taught myself how to do my taxes when I was 16 years old (file early even if you don’t have to pay tax as this starts giving you RSP room).
5) An accountant costs money, I want that money in my pocket.
Re: learning investments Rogers has a great deal going that you can add a magazine to your cable bill for 1 dollar. Moneysenese is a magazine that covers a variety of financial topics, and especially covers investment vehicles — but they also do it in a very down to earth kind of way. For 6 dollars a year (they only print bi-monthly) — well worth the $.
Good luck 20 something’s!
March 18, 2010 at 9:32 am
@ Tesla – Canadiancapitalist.com and milliondollarjourney.com are very good Canadian sites on investing.
Moneysense.ca is also good, you should read about ‘couch potato’ investing. It’s what I do, I just buy an index fund (basically little pieces of ALL the biggest companies in the US) and sit back. Basically I’m betting that all the companies I use and buy from everyday (Coke,McDonalds, Johnson and Johnson, etc) aren’t all going to go out of business. Meanwhile I keep getting nice little dividends from them.
As for being scared to invest, I understand that but I think you should keep on your path of education and that should take the fear away. One thing I did was find out that the stock market’s worst return over 20 years was 2.5% and its best return over 20 years (from 1899 – 2009) was 18%. That made me feel better. The other thing I do is be aware of my appetite for paper loss and paper gain. In other words, last year my investmetns were down 40% but I didn’t actually sell and now they’re down about 10%. In otherwords, a paper loss/gain doesn’t mean a real money loss/gain. That made me feel better too.
March 18, 2010 at 9:32 am
I think your 20s is a great time to learn about investing. You can read about it in your spare time without the pressure to put money on the line. But be warned: for every book you read telling you to do it “this” way, you’ll find another that says you should do it “that” way.
My personal preference, especially for beginners, is the Couch Potato Portfolio strategy. You can read about it at the Canadian Business website. Also, there is a new blog called Canadian Couch Potato that has some good information.
I’ve considered writing a brief “investing basics” e-book and offering for free on my site. I just haven’t gotten around to it yet.
March 18, 2010 at 9:44 am
I’ve always done my own taxes as well! The first year i had a job and had to do them, my mom sat me at the table with all the forms I needed and told me to get it done.
There was lot of whining involved and she would just ask “what does it say:… i’d read it out loud and she’d say “so do that”
I had one T4 at the time.
Now I do my taxes, my boyfriends, and my grandmothers – and it’s still that easy. Just read it.
March 18, 2010 at 9:49 am
For all you pushing Quicktax also have a look at Ufile. The Ufile Basic is 19.99, does 8 returns, has pension-splitting, etc. In fact, it does more than Quicktax but for less money. I’ve also read that Ufile is made by a Canadian company and Quicktax American but I have not looked extensively into this. Just my 2 cents!!
March 18, 2010 at 9:57 am
My taxes go along for the ride with my husbands to the tax preparer as he is self-employed. We are paying for the taxes to be done anyways and it doesn’t cost any more to have mine included.
I prepare my sisters via QuickTax online. Super easy – a T4 and RSP slips and cheap.
Now that my husbands business is Incorporated and he will have a T4 for his 2010 tax year, I am seriously considering doing our taxes myself. I am not 100% confident that the tax guy has been doing our taxes 100% correctly (for our best tax advantage since DH is self employed and we have children) based on deductions and tax credits.
We’ll see.
March 18, 2010 at 10:05 am
I filed with Ufile.ca this year because I just discovered that as a post secondary student it is completely free. It was very easy and you can view all your information before electronically filing it. It is also free for people below certain income levels, so it would be great for teenagers who are only working part time. Once I saw how easy it is to file, I filed my fiance’s too and we got exactly back what the program told us we would. It only took about an hour and a half to complete both returns. Definitely check it out if you’re into quick and easy solutions.
March 18, 2010 at 10:32 am
I’m 29 and I loved to read this series of financial focus in your 20s.
3 things I want to work on:
1) Insurance
2) taxes
3) investments
I’m presently on mat leave and its really an eye opener for me because I have to be very careful managing my money now since I took a 7 months extended mat leave with no salary. It’s working out good but I have to be aware of all our expenses.
Love to read everyone’s comments.
March 18, 2010 at 10:49 am
i own my own business and use quicktax basic. only $40 a year and is good for 8 returns! we split that cost with family who use it when we’re done. i used to go to an accountant and it was just way too costly, so i switched and am glad i did. its not that hard!
March 18, 2010 at 10:53 am
I want to add me and my bf have our taxes done by an accountant. It cost 60$ per person. Yes its a bit pricey but for now I dont mind spending those extra dollars and I can have a free mind.
March 18, 2010 at 11:02 am
My father was an accountant and he started me on taxes when I was about 10. at the time it was impowering (boring albeit). I filed even when there wasnt a need to, and then when I got a part time job I learned how easy it still was. Then dad did them for my wife and I for the first few years but I was still involved. He then experienced some bad health, i tried paper and pencil but grew increasingly frustrated if you made a calculation error, the whole thing was wrong and needed to be started over. I discovered Ufile and have completed 2007, 2008 and 2009 with this on line program. it is very easy to use and very accurate.
March 18, 2010 at 11:33 am
This post really gets me thinking… about all kinds of issues, great post Gail! Ihave 2 questions:
1) I have a TFSA and Savings accounts with Ing. I noticed yesterday while checking my online accounts, that ING offers Mutual Fund…. I dont know if its new to them or its just that I haven’t notice before…. Anyone have an opinion or advice or experience with ING’s mutual fund???
I also want to apologize for my spelling…. French being my first language, I know I may be doing so errors in English.
2) I work as a teacher for a school board in Montreal. I’m permanent at my job. I have a government retiring pension plan in which I contribute every pay. I questioned some of my work colleagues on RRSP. WOW! I got so many different opinions it gets me confused. Lots say they dont need RRSP because of the pension plan we will get with the government. I’m not that found of this opinion but I wanted people on this blog to react to this statement. So, here’s the story. I’m a 29 permanent teacher with no RRSP. Should I start an RRSP considering our pension work plan is very good???
March 18, 2010 at 11:42 am
If you go to the Canada Revenue Agency site this page http://www.netfile.gc.ca/sftwr-eng.html lists all the different tax preparation software that is authorized for netfile. The one I’ve been using for the past 4 years is called StudioTax. It’s freeware, is fully certified and checked by the CRA to be virus free. I usually send them $5.00 as a donation because it is an excellent program – on par with the costly ones – and I want them to continue producing it!
I have been preparing my own taxes for about 15 years now. When I had my first summer job my dad did them for me, but once I started my career I used H&R Block. What a ripoff! All I had was my T4 and they charged me $15.00! I think I only got $20.00 back too lol. After that I got lazy and just didn’t bother doing my taxes… what a dope! Luckily I didn’t owe any money, so when I finally smartened up and had a friend do the 4 years outstanding, it didn’t bite me in the butt.
I know people that will mail in the blank forms along with their T4, people who do it with pencil and paper, some pay accountants and other tax preparers. They all seem relatively satisfied with the service they get, so do whatever makes you happy.
On a last note, if you are completely helpless at doing your taxes, CRA is extremely helpful. The first time I attempted to do my taxes (pencil and paper) I knew something was wrong, the numbers were out to lunch! So I called their 1-800 number and the guy on the phone talked me through it line by line. Basically the CRA did my taxes for me over the phone! After that experience I refused to pay someone to do them for me!
Hopefully this will help someone decide to take that leap and do their own taxes. Enjoy! p.s. I did mine and received my return almost a month ago now
March 18, 2010 at 11:56 am
I second “SimpleSavings” recommendation of StudioTax. I have used Quick Tax in the past, but for the past two years I have completed my husband’s and my joint returns using Studio Tax. It works great and you can’t beat free. I am sending in a donation, too, because I appreciate the work done to develop the software.
March 18, 2010 at 12:06 pm
Sunshine, I would not recommend ING’s mutual funds. Each of the funds is composed of 4 indexes (canadian, us, international equities and canadian bonds). They charge 1% MER, which is high for index funds. The only advantage is that they have combined 4 indexes into a single fund so it’s the only one that you would need to buy and you wouldn’t need to do any rebalancing. I’d recommend that you buy index funds from someone else. For very minimal work, you can get lower fees. You can even mirror the proportions in ING’ funds if you want.
March 18, 2010 at 12:09 pm
@ Jay – though there are cheaper index funds around (ie TD efunds) I don’t think Ing’s MER is out of whack in a world where MERs of 2-3% are much more common.
March 18, 2010 at 1:14 pm
Regarding #9, there’s no shame in renting. There’s too much of a homeownership mentality in North America, when compared to European and Asian countries. My inlaws just “bought” (aka rent from the bank) a townhouse, and they’re probably paying 30-40% more monthly than people who rent in the complex.
March 18, 2010 at 1:27 pm
Sunshine,
I am in the exact same position as you (with the exception of not being on mat leave), although I’m a teacher in BC (also permanent and 29 years old). I have decided to maximize TFSA’s instead of RRSP’s. The issue with RRSP’s is that you will eventually pay the taxes on them when you pull them out at retirement. At that point, my pension will be based on my last 5 years of employment salary, which will be its highest for me. It makes more sense to me to pay the taxes on that income now, while I’m in a lower tax bracket and invest them in TFSAs that are not savings accounts. Many people seem to think that a TFSA has to be a savings account. It can actually be any investment vehicle – GIC’s, stocks and bonds can all be registered as TFSAs. Since typically we make more interest on higher risk investments, it is my plan to maximize the TFSA in an investment portfolio. When I go to take that money, along with my pension at 65 I will not owe any taxes.
I would never assume that the teacher’s pension is going to be adequate at retirement. Just this year, our teachers had to vote on whether to do full indexing with our funds, because with all the boomers retiring, the funds are getting depleted in a big swoop and there isn’t enough cash to invest and keep us up with inflation. Many people don’t even understand that a pension fund is an investment fund, and like anything else, we can lose money. That, and when we retire we also lose our health benefits, so although my mortgage will hopefully be gone, my health care costs (even things like the dentist, optometrist, etc) may be significant.
March 18, 2010 at 2:02 pm
I don’t know if other banks do this too, but RBC has a practice investment account which I’m really enjoying. I’m not comfortable enough with investing yet to do it for real, but I’m also someone who learns by doing rather than reading. This way I get to play around with my “money”, figure out how things work and see what happens over time. If something goes terribly wrong, I can always start a new account with another notional $100,000 and learn from my mistakes. I highly recommend giving it a try.
March 18, 2010 at 3:05 pm
@Angela — that’s soooo cool! Way to go RBC!
March 18, 2010 at 3:34 pm
Reading The Wealthy Barber by David Chilton made me much less afraid of investing, and finance in general.
I have an accountant to do my taxes, as 1) I HATE doing taxes and 2) one year CRA treated me like a scofflaw over an honest mistake. CRA can talk to the accountant hand in that case….
March 18, 2010 at 3:36 pm
Thanks so much for these postings this week Gail. I am an almost 40 something who has been following as we transition jobs etc as best I can your plan. I work with several twenty year olds with whom I have been sharing about your tv show & book. This is the best advice I could pass on to them, besides the general suggestions to get their act together while they are still single and stick to their financial goals! Have a great MarchBbreak!!!
March 18, 2010 at 4:38 pm
Sunshine,
I think it would be prudent to save either in TFSA or RRSP for your retirement (or both), above and beyond your pension. I have a similar situation in that my pension from work will replace a good portion of my current income in retirement, however, I am also saving into RRSP and TFSA for use during retirement for such things as household repairs/upgrades, buying new vehicles, taking trips, etc… things that go beyond your day to day expenses that the pension will cover.
March 18, 2010 at 4:56 pm
I have done my own taxes since I was 17 years old. When I was in grade 12 math, my teacher asked who worked part-time…then she asked “Do you want to make $100 for not doing much of anything?” Of course we all said yes (she was referring to the Ontario Tax Credit). She told us to go to the post office and get our own copies of the tax form and to bring them in along with our T4 slips. She taught us all to do our taxes that year and we all happily came in about a month or so later with $100 cheques in our hands. I have done them on my own ever since…such a great skill to have. Up until last year I have done them by hand, but this year we used Quick Tax and I love it!
March 20, 2010 at 9:12 am
Regarding all the people with pensions deciding to go for an RRSP, the decision should depend on if the taxes you pay when you’re retired will actually be less than the taxes you pay now when you put the money in. If you’re at the start of your career as a teacher then you will probably make more money from your pension when you retire than you are currently making. In this case you will actually lose money using an RRSP versus saving the money in the same products (savings, bonds, stocks, etc) outside of an RRSP. If you make more now than you will from both your pension and your RRSP income combined then using an RRSP makes sense since you will be taking money out when you are in a lower tax bracket. Generally though you probably want to max out a TFSA before using an RRSP unless you make significantly more money now than you will in retirement.
March 20, 2010 at 9:25 am
Tim: Does your thought about RRSP’s vs. TFSA’s take into account inflation, and how it’s likely that due to inflation in 20+ years, that the current tax brackets will also change as a result? I am really curious, not intending to knock your judgement. My raises tend to only go up by the amount that inflation has risen (just 2% per year)… So, it’s only logical that I will eventually be making more money in 20 years than I do now, but it won’t be a LOT…
March 20, 2010 at 11:20 pm
People here seem to think hiring an accountant will only get your taxes done & filed. You should use an accountant as a consultant for tax planning. Tax software can highlight deductions you might miss, but it’s only plugging in numbers. It won’t tell you if you’ve arranged your affairs in the most tax-efficient way possible.
For people with very simple returns, it’s not worth it because the only tax planning consideration is probably RRSPs vs. TFSAs.
People here also seem to equate accountants with tax professionals. While many tax professionals are accountants, not all accountants have a high degree of tax expertise.
March 21, 2010 at 8:32 am
@ Derek:
Actually, the software does seem to suggest using my calculations in the most efficient way possible… One example is to suggest I hold my donations until the next tax year, another is to suggest putting a deduction on my husband’s tax forms, to allow for a greater benefit due to his tax bracket…
The person that I hired was recommended by our credit union as a “tax professional” and missed very basic inclusions, like our union dues. AND, missed the deadline.
But I agree. For people with more complicated returns, they probably should hire a professional, but I would check them out first…
March 21, 2010 at 7:28 pm
Jay: thank you for answering my question of Mutual Fund by ING. Your answer made me learn stuff I didn’t know.
Jennifer: nice to here youre a teacher too!
Ms T. Youre right. Maximizing my TFSA or RRSP is important, even with a suppose to be good pension later on. We never know what the future will bring us.