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6 Money Secrets You Should Learn in Your 20s

Kandice Martinez
August 4, 2023

When it comes to personal finance, most young people tend to overlook its importance. But as we grow older and reflect, we realize there are some essential money management skills we should’ve grasped in our 20s. While these lessons are universally valuable, let’s explore how they particularly apply to young Canadians.

Budgeting – Your Financial Blueprint

Picture your financial life as a building; a well-structured budget serves as its blueprint. It’s a tool that helps you allocate resources effectively, avoid unnecessary debt, and reach your financial goals. Let’s say your monthly income is $3,000, and your fixed expenses such as rent, bills, and groceries total $2,000. Your budget will highlight that you have $1,000 for saving, investing, or other discretionary spending.¬†

The Safety Net – An Emergency Fund

Financial uncertainties are inevitable; an emergency fund acts as your safety net. Imagine a scenario where your laptop crashes or your car breaks down with a repair cost of $1,500. Without an emergency fund, these situations could thrust you into high-interest debt. A useful starting point is to aim to save at least $1,500 in a high-interest savings account. Ideally, your emergency fund should cover three to six months’ worth of living expenses to cushion against significant financial disruptions.

The Two-Faced Power of Interest

Interest can be your best friend or your worst enemy. Consider taking a loan of $5,000 at an annual interest rate of 5%. Over one year, you’ll owe $250 merely on interest. On the flip side, if you invest the same $5,000 in an instrument offering an annual return of 5%, you will earn an extra $250. These scenarios underscore the importance of understanding interest when deciding to borrow or invest money.

The Gateway to Financial Products – Your Credit Score

Your credit score is the gatekeeper to your financial dreams. With a good credit score, you may easily get approved for a mortgage or loan and secure lower interest rates. On the contrary, a low credit score might mean higher interest rates or outright denial. For instance, if you aspire to own a home, a low credit score could mean paying thousands of dollars more in interest on your mortgage. Regularly checking your score and credit report, through services like Equifax or TransUnion, keeps you abreast of your credit health.

The Double-Edged Sword – Credit Cards

Credit cards can be a boon or bane, depending on their usage. Let’s illustrate this with an example: You use up $2,000 on your credit card, which carries an annual interest rate of 20%. If you only make the minimum payments each month, you could end up spending almost 11 years to clear the balance, costing you almost an additional $2,000 in interest. Used properly credit cards can be an excellent tool to improve your credit rating, however you should always aim to pay off your full balance every month to avoid the interest trap.

The Long Game – Retirement Savings

Think of your retirement savings as a marathon, not a sprint. If you start saving $200 a month at age 25 in an RRSP, assuming an average annual return of 5%, by the time you retire at 65, you would have contributed $96,000. However, thanks to the power of compound interest, your account would have grown to over $325,000. The sooner you start, the more time your investments have to grow, generating a significant return over the long term.

Understanding and managing your finances might seem like a huge challenge, but it’s never too early or too late to start. Learning these six key financial skills can set you on a path towards a secure financial future. Remember, in Canada, there are plenty of resources and platforms to assist you on this journey.