Many young Canadians are putting their retirement at risk by not considering how much money they’ll need and delaying saving for retirement, according to a recent BMO Retirement Institute report.
Only one in 10 young adults between the ages of 18 and 34 have thought a lot about how much money they’ll need to save for retirement. And 27 per cent admit they haven’t even started saving for life after work.
Poor planning? Maybe. But, rather than worry about retirement, I’d suggest most young people should actually make getting out of debt their top financial priority.
Debt Reduction Takes Priority
Don’t get me wrong. There’s a lot to be said for the smart use of credit to reach a goal like home ownership or a college education. There’s also a big difference between someone who’s just finishing grad school and a 30-year-old electrician.
But they do have one thing in common: both need to be smarter about how much they borrow and what they do with that borrowed money.
But this doesn’t seem to be happening. A recent Ohio State study found that the more credit card and student loan debt 18 to 27-year-olds held, the higher their feelings of self-esteem and the more they felt they had control over their lives.
Only the oldest of those studied — those aged 28 to 34 — began showing any signs of stress about the money they owed, says lead researcher Rachel Dwyer.
“By age 28, they may be realizing that they overestimated how much money they were going to earn in their jobs,” she explains. “When they took out the loans, they may have thought they would pay off their debts easily, and it’s turning out that it’s not as easy as they had hoped.”
RRSPs Can Wait
Well, I’ve got news for them. Waiting isn’t going to make things any easier.
The truth is, for most 20-somethings, the most effective use for any extra cash is actually to use it to pay off their debts, despite the fact that RRSPs offer a nice tax deduction and interest rates continue to be quite low.
That isn’t as hard as it might seem. Since they’ve been accustomed to living on a shoestring budget while at university, it’s not a big leap for many recent grads to set aside part of each paycheque, even if their income levels are still relatively modest.
And the fact that many young people live at home for the first few years after graduating provides an additional opportunity to sock away some serious cash — but not if they haven’t cleared off their debts first.
Develop A Budget
Figure out what you’re spending money on and learn how to live within your needs. If you don’t already have a budget, take a month’s worth of bills and receipts and divide them into categories like utilities and entertainment. Then tally them to see where your money is going and determine what amounts can go towards debt reduction.
From there, tackle the debt with the highest interest rate, which is usually a credit card. Quit paying just the minimum, you’re just digging yourself a bigger hole. Try tripling that amount instead.
Don’t go for the easy target here. Some advisors suggest concentrating on the smallest debt first, regardless of the rate. They argue that most people need the positive reinforcement of actually getting one nagging bill off their list.
If you need that boost, that’s OK, but it’s going to cost you more money in interest. Check out What’s The Cost (http://www.whatsthecost.com/snowball.aspx) to tally the difference.