A smart kid goes to university and graduates with a large student loan. She spends several years working to pay off the loan. While paying off the loan:

• She delays becoming independent and stays at her parents’ home.
• She wants to buy a home, but feels it is out of reach. She has no down payment and knows it will take years to save up.
• She applies for a credit line or a mortgage, but has no assets at all and a negative net worth.
• Wise people annoy her with good advice about starting to save for retirement early while “time is on her side”.
• She is in her late 20s and feels she has accomplished nothing.

People in their 20s are a unique challenge for a financial planner. There are so many possible goals and so much uncertainty about life.

The goals you should consider in your 20s could include:

1. Pay off your student loan. You were taught to pay your debts. You don’t like the payment. You may get a tax credit on it, though.
2. Move out of your parents’ place alone or with friends to learn about yourself and become independent.
3. Buy a car. It is an important part of being independent. You may not need one if you live in a large city, though.
4. Save up a 20% down payment for a home. You likely will want to buy a home within 5 or 10 years, or when you get married. Owning a home is a good investment. It will take years to save this.
5. Start saving for your “financial freedom” (retirement). The “magic of compounding” by starting early is huge. For example, if you start in your 20s, instead of waiting until your 30s or 40s (when you might have the money), you have 40 years until retirement. If you invest $500 per month at an average 8% return:
   1. For 20 years, you have $284,000.
   2. For 30 years, you have $704,000.
   3. For 40 years, you have $1,611,000.

What is your priority?

The uncertainties of your life make it hard. You don’t know where your career is going, when you will meet the “right person”, or what you want to do with your life.

How do you decide on your priorities?

1. Think about what you want from your life and your career.
2. Think about what is likely to happen to you in the next 5 or 10 years.
3. Sit down with a financial planner, even if you have to pay for a couple hours of their time. You need advice from experienced, knowledgeable people. Your parents are probably not money experts. Your friends have no more life experience than you.

The best general advice:

1. Live frugally.
2. Keep your total debt payments under 10% of your income. Then they probably will not affect your ability to get a mortgage.
3. Pay off your credit card every month.
4. A new car is a sign of a spender, not a sign of someone with money.
5. Start your “financial freedom” long term investments at 10-20% of your income before you get used to spending it. Focus on equities.
6. Save most of your money for a home down payment in 5-10 years, so you have the option. Target 20% down to avoid CMHC fees (plus closing costs, land transfer tax, furniture costs, etc.). You can save $25,000 in your RRSP for a home.
7. Do not buy a home too soon. Wait until you know you will live in it at least 5 years and your career is settling in. If you sell in less than 5 years, you will probably lose money after all costs to buy and sell. Studies show renters tend to have better careers, because they are able to move for a better job.

One thing for sure. Putting 100% of your money into goal #1 (pay off your student loan), while putting zero towards goals 2 to 5 (independence, house, car & retirement) is almost definitely wrong!

Ed

The post Why Paying Off Your Student Loan is the Worst Thing to Do appeared first on Ed Rempel.

“90% of putts that are short don’t go in.” – Yogi Berra

Why are some people able to become wealthy relatively easily, when most people struggle with their finances? In Canada, about 1 person in 50 is a millionaire and in the US about 1 person in 13 is millionaire^* – which is probably a lot more than you thought. A recent BMO Harris study found that only 6% of millionaires inherited their wealth and 94% made it on their own.

In short, lots of people are wealthy and nearly all of the millionaires and billionaires made it all on their own.

From experience in talking with literally thousands of people and then seeing their complete finances, we can usually tell who is wealthy and who is not just by talking with them. We have found that the main difference between the wealthy and people that struggle financially is not their education, career, salary, type of family or anything like that. The main difference is the way they think about money.

Here is the secret: Wealthy people are focused on building wealth. Most people struggle financially because what they believe about money makes them focus on other things.

Here are the beliefs about money that cause most people to struggle financially:

“The Sacred Cow” beliefs:

Here are 3 common beliefs that are a big part of the Canadian psyche. In our opinion, they are the main reason most people struggle financially. We put these 3 beliefs together and call them the “Sacred Cow”:

1. You should try to look like you are wealthy. Most people are not wealthy because they don’t really want to be. They want to spend a million – not have a million. Most wealthy people are actually relatively frugal and are good savers (at least until they are wealthy). “Conspicuous consumption”, such as expensive cars, clothes, jewelry, electronics and even homes are signs of being a spender – they are not signs of wealth.

If you sense someone is trying to impress you by looking wealthy, he is almost definitely not wealthy. He is probably just a spender. Wealthy people usually downplay their wealth. It is the non-wealthy that try to impress others with money.

Years ago, when we used to go to the homes of new potential clients, we had what we called the “4-bedroom house and 2 minivans rule”. If we pulled up to a large, 2-story house with nice landscaping and 2 expensive vehicles in the driveway, we would just look at each other and shake our heads. They almost definitely have little money.

Then we would see their finances and in most cases, they were up to their ears in debt. The house was fully mortgaged, they had credit lines that are maxed and credit card balances, and the vehicles were leased. It was shocking how often the value of the 2 vehicles in the driveway was more than their net worth!

Most millionaires live in ordinary neighbourhoods and few people know they are millionaires, as explained in the classic book, “The Millionaire Next Door”. Truly wealthy people usually downplay their wealth. They get a feeling of confidence from having money – not from spending money.

2. It is most important to pay off debt. When we meet people with no debt, they are almost always among the poor or middle class. Wealthy people tend to have a lot more debt than non-wealthy people. Most Canadians tend to spend the bulk of their working life focused on paying off their mortgage and other debt, which we call “getting up to zero”.

Being in control of debt is obviously important, but wealthy people are focused on building their net worth – not on paying off debt. In fact, borrowing to invest in their business or in the stock market is almost always the reason they are wealthy.

Paying off debt is just “getting up to zero”, which will not make you wealthy.

3. The stock market is risky. We find that most Canadians have a quite exaggerated view of how risky the stock market is, which stops them from ever having wealth. They are scared to invest a lot in the stock market. They believe the stock market is a gamble and crashes all the time, instead of focusing on the long term growth of the stock market.

You need to picture being wealthy. Imagine having a $5 million investment portfolio. You did not get there by investing in bonds. Properly invested mainly in the stock market, on average your net worth grows by $500,000/year. However, most years are not average. Quite often, your net worth grows by more than $1 million in a year.

But it also goes down several times a decade. In fact, once or twice a decade your portfolio drops by more than $1 million. In 2008, your $5 million could have dropped to between $3-3.5 million – a drop of $1.5-2 million. That’s a lot! However, you are focused on building wealth and know investing this way is what will grow your wealth in the long run.

Here’s the point: If you are scared to have a large stock market portfolio, then how will you ever build wealth?

Story of Reg and Rich

Just picture a typical Canadian named Reg. His parents taught him that “all debt is bad”, so his main focus financially during his life is paying down debt. He does not want to look poor, so he still buys a decent home, car and furniture, and travels regularly, but he always focuses on paying off his credit cards. He uses his extra cash to increase his mortgage payments.

He has some RRSPs, but he does not want to lose much money. Therefore, he invests conservatively partly in GICs and partly in balanced and income mutual funds. He focuses his investments so he can “sleep at night”.

Obviously, Reg will never become wealthy, will he? The way he thinks about money will prevent him from investing enough to ever become wealthy. He invests too conservatively to build any serious wealth.

His brother, Rich, has always wanted to be wealthy. He is constantly thinking about ways to invest more. He has a small business on the side and rents out his basement. He invests nearly all this extra money and his bonuses, mostly in addition to RRSPs. He does not spend a lot of time on his investments. He has a sensible approach and just keeps investing $30-50,000 every year. His entire portfolio is long term investments focused on growth.

He has an average home in an older neighbourhood and has lived there for more than 20 years. His family teases him about his 15-year-old Honda Civic, but he likes it.

Both Reg and Rich are in their mid-50s and appear to be doing fine financially. Reg has a newer home and much nicer car, but Rich has a calm confidence about him. The main difference is that Reg’s investments are $250,000, while Rich’s portfolio is over $5 million.

Think like the wealthy.

The good news about this is that you can change the way you think about money. If being wealthy resulted from being lucky in how you were born, you would have no control. But since it is primarily a result of what you believe about money, it is within your control.

Here is how the wealthy think about money.

Our experience is that the poor have most of their money in consumer items, such as a car. Middle class

people have most of their money in their home or other real estate. Wealthy people have the bulk of their wealth in their business or in the stock market (many businesses). That is why they are wealthy.

Wealthy people are also usually prudent with their investments, but the big difference is that they save a lot and are focused on investments they expect to grow long term, instead of investments that fluctuate less short term. They tend to be confident in investments because they are optimistic about the future – not fearful and pessimistic about short term risk.

The reason they are multi-millionaires is that they have millions invested in their business or in the stock market. Wealthy people are wealthy because they are focused on building wealth. Specifically:

1. They are usually frugal and good savers (not big spenders).
2. They are focused on building their net worth (not paying off debt).
3. They are generally optimistic about the future (not fearful and pessimistic).
4. They are focused on long term wealth-building investments (not short term risk).

Learn to think like the wealthy and you can become one of them.

Ed

^* Spectrum Group

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