As new graduates enter the work force this spring, some will be ill prepared to manage their finances. Many of them will spend and not save as they experience the thrill of their first post-student earnings. Learning to budget is a crucial skill that university and college graduates need to achieve independence.
Financial planning does not need to be stressful, labour-intensive or scary. It can be as simple as goal-setting. Those who budget will reach more of their financial goals faster.
One of the easiest ways to motivate people to budget is to have a specific goal, says Kevin Cork, a Certified Financial Planner (CFP) professional in Calgary with the Absolute Group. "Financial planners (usually) focus on the three big ones, which are paying off your mortgage, retiring and saving for a kid's education." However, these are not usually concerns for recent graduates, Cork adds. "What we talk to them about instead are things like a trip to Mexico."
For example, if a graduate spends a year budgeting for a $3,500 trip to Mexico, it will cost about $11 per day -- a sum roughly equal to two Starbucks lattes. "What you're doing is turning lattes into Cancun," Cork says. Although different types of expenses can get in the way of saving, "the culprits are usually drinking and eating out."
Matthew Bell, a graduate of Western University's Ivey Business School, recalls how he managed the internship money he made while he was a student. "There's a huge opportunity cost for every dollar that you spend instead of save. Not being aware of that is a big disadvantage," he says. "Every dollar you earn when you're younger has more time to grow. The longer you go on not saving, the more money you potentially lose."
If you are among the students who spend a lot of money on beer and other alcoholic beverages, Bell's advice is to do so in moderation and keep an eye on costs. "Buy Smirnoff instead of Grey Goose."
Bell created an Excel spreadsheet to track his expenses. "Any given month, I can download my transaction history from my bank." The spreadsheet shows him how much he's spending and where it's being spent.
Cork recommends that millennials take advantage of budgeting apps, which make budgeting easier and faster. "They're doing a good chunk of your budgeting work for you," he says. "Millennials are growing up online and on their phones. It becomes a natural extension of the things they're doing at work [and] how they spend their day."
Mint is a free budgeting website and app. It allows users to link their credit cards and bank accounts and to record their transactions. It creates easy-to-understand pie charts and bar graphs to display users' finances. It allows users to create and manage goals, like paying off student debt or saving for a trip.
Mint users can choose to receive alerts when they go over budget or have a bill coming due. Another budgeting service, Quicken Home, costs between $39 and $89 per year.
Hiring a financial planner can be expensive for young adults. "There's certainly enough information online that if you're motivated enough, you can get a pretty good financial education for free," says Cork.
A reputable source for managing money is the website of the Financial Planning Standards Council. The site has a variety of functions, such as matching users with a CFP professional by name or location, a monthly newsletter and videos and research that summarize their studies. It's a good place to start for young adults who are learning to budget.
Elsewhere, the major Canadian banks have budgeting tools on their websites, like a retirement calculator, a goal planner and an income-tax planner.
Living at home is an effective and popular saving strategy. About 34% of young adults aged 20 to 34 were living with at least one parent in 2016, according to Statistics Canada.
Among them is Carleton University graduate Rob Denaburg, who began budgeting for a trip to Europe after completing his undergraduate studies. "After university, I moved home. Part of the incentive to do that was so that I didn't have to spend money on rent, I didn't have to spend money on food, I was able to work [and] I was able to save a good amount of that money for the trip," he says.
Doing without a car is another way for recent graduates to save money, says Alim Dhanji, CFP, a financial planner with Assante Wealth Management in Vancouver. "A great way to lower your transportation costs is to live closer to where you work and use transit or rideshare," says Dhanji, so you don't have to pay for motor-vehicle costs such as gas, insurance, loan payments and maintenance.
"If you borrow to pay for something, it's going to cost you a lot more," Dhanji says. If you save instead, "you might be able to take an extra holiday because it costs less, or a bigger holiday or a longer holiday."
Below are some final tips to remember when preparing to budget:
- Automate your savings by transferring the same amount to a savings account once a month. People can easily forget if they have to do it manually.
- The best way to track transactions is to use a single credit card or debit card for everything. Card issuers will provide clients with their transaction history, often separating them into broad categories that can be viewed online.
- Make sure your budget provides for purchases that come only once a year, such as home insurance. These are often forgotten in budgets.
- Remember to take advantage of the tax-free savings account (TFSA), which allows contributions to grow tax-free.
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