As a young adult, you’re starting to earn your own money. But do you know exactly what to do with it to keep yourself out of debt and have a little something extra for a rainy day? That’s where a personal financial plan can help.
And the key is to start early. Building credit and a financial cushion takes time, so what you do between the ages of 18 to 24 can affect your financial life at 30 and beyond.
As a young adult, it’s important to embrace financial literacy to be able to make smart financial decisions. At the same time, there are some products you can use and tips to consider to help take your dollar further.
File Your Taxes To Take Advantage Of Government Benefits
If you’ve started working, you must file your income taxes. Filing your taxes every year is important even if you don’t earn any income, because you may still qualify for certain benefits.
Here are a few key government benefits that may be available to you:
GST/HST Tax Credit
Lower-income households may be eligible for the GST/HST tax credit. Most products and services sold in Canada require an additional Goods and Sales Tax (GST) and/or Harmonized Sales Tax (HST) added to the ticket price. Lower-income Canadians can offset these extra charges through the GST/HST tax credit provided by the federal government.
This credit pays out four non-taxable payments every quarter. The maximum tax credit amount depends on your marital status and income.
Canada Child Benefit (CCB)
If you’re a young parent, you may be eligible for the Canada Child Benefit (CCB). The CCB is available to families with children under the age of 18. This tax-exempt benefit is meant to provide financial assistance to lower-income parents and hedge against poverty.
The annual amount you may be eligible for depends on your income, the age of the child and the number of children in your household.
Grocery Rebate
Whether you live alone, with a roommate or with your parents, groceries can take a toll on your income, especially due to inflation. Thankfully, the Canadian government’s 2023 federal budget includes a grocery rebate, which provides $2.5 billion in targeted relief to help struggling Canadians cover the cost of groceries as a result of skyrocketing food prices.
The grocery rebate is a one-time payment. Payment amounts will vary based on your income and household composition. Couples with 2 children can get up to $467, single Canadians with no children can get up to $234 and seniors will get $225.
Solidarity Tax Credit (STC)
As a student or young professional, you may be earning a lower-than-average income. If you live in Quebec, you may be eligible for the STC, a refundable tax credit for low-to-moderate-income households. You may receive up to $800 or more per year if you meet the requirements.
Climate Action Incentive (CAI)
The CAI, also known as the carbon tax rebate, is a tax credit that the federal government introduced to help offset the cost of federal fuel or pollution charges. It must be claimed on your income taxes.
CAI payments are made on a quarterly basis to eligible recipients in Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, Newfoundland and Labrador, and PEI.
Job Hunting And First Jobs: How To Find The Right One
As a young adult, you’re likely looking for a job or just starting your career, so it will take time to develop your skills and experience and eventually build a healthy income. While your salary is largely determined by the level of education and experience you have, there are plenty of high-paying jobs in Canada that don’t require degrees.
Can You Get A High-Paying Job Without A Degree?
Yes, here are some of the top-paying jobs that you can apply for without post-secondary education, along with their average annual salaries:
- Miner: $84,290
- Car Salesman: $49,500
- Translator: $57,602
- Truck Driver: $47,053
- Construction Manager: $83,620
- Conductor: $68,874
- Firefighter: $61,828
What If Post-Secondary Education Isn’t For You?
As mentioned above, you can still get high-paying jobs with no degree, but if you want an alternative route to post secondary education, you should consider the Red Seal Program. It is a certification program that offers nationwide industry-standard training for trade workers. Anyone who has this certification can get a high-paying job within that trade anywhere in Canada since all provinces recognize the Red Seal Certification.
Include A Emergency Savings Fund As Part Of Your Personal Financial Plan
Having a job is key, but you shouldn’t rely solely on your employment income. There may be times in life when you suffer interruptions in pay, and other times you may find yourself with a large unexpected expense that your existing finances may not be enough to cover.
In these cases, it helps to have an emergency savings fund established. That way the money will be there immediately when you need it without having to scramble to borrow from others or take out a personal loan.
Even if you’re still a student, it’s good to have an emergency savings fund. Ideally, you should have enough to cover at least three to six months of expenses. This will help you deal with unexpected expenses without getting yourself into high-interest debt. Plus, it can give you enough time to find another job, if necessary.
How Much Should You Save Between The Ages Of 18 To 24?
Generally speaking, young adults should save at least 10% of their income. As salary increases, so should the share of money set aside for savings.
Regardless of how much you put away every month toward your savings, the most important thing is to start early. The sooner you start saving, the more time you’ll have to build a solid financial nest egg. You can put money in a regular savings account, TFSA, RRSP, FHSA, or other investment vehicle to help your money grow while it’s set aside.
Having about $10,000 by the time you’re anywhere from 18 to 24 years of age is ideal. Moreover, building from there will give you a healthy financial start.
What’s The Average Income Of 18 To 24-Year-Old?
According to Statistics Canada, the average income in 2021 for Canadians between the ages of 18 to 24 years is $20,000.
That’s significantly less than the average income for all age groups aged 16 and over, which is currently $54,000.
Personal Financial Plan: TFSA Vs FHSA Vs RRSP: Which One Should You Use?
There are a few different ways to stash your cash and help your money grow, as well as to hedge against taxation. Part of a personal financial plan is understanding which method is the best way for you to save money. Depending on your income level and saving goals, one account may provide more benefits than the other.
Tax-Free Savings Account (TFSA)
A TFSA is a government-registered savings account that lets you hold several investment products, unlike a traditional savings account. The money earned in a TFSA is tax-sheltered, which means you don’t pay taxes on your earnings. As such, you can freely withdraw from your TFSA without triggering taxation.
TFSAs can hold many types of investment products, such as cash, stocks, bonds, mutual funds, exchange-traded funds (ETFs), and Guaranteed Investment Certificates (GICs).
A TFSA is a good fit for both short- and long-term savings goals. It’s suitable if you’re looking for a financial product to help you put extra money away to grow tax-free at a higher interest rate than a regular savings account.
First Home Savings Account (FHSA)
The FHSA is a program that the federal government established to help Canadians buy their first home. The program began in 2023 and can help eligible applicants save as much as $40,000 to be used toward the purchase of a property.
The annual contribution limit to an FHSA is $8,000, and any unused contributions cannot be carried over for 1 year. If you don’t use the unused contribution room within the next year, you lose that contribution room. Every contribution made will reduce your taxable income by the same amount.
Like a TFSA, the interest earned in an FHSA is not taxed. Plus, funds withdrawn from the account don’t have to be paid back. Keep in mind, however, that you’ll have one year from the first withdrawal to close your FHSA account.
An FHSA is a great option for younger Canadians looking to eventually buy their first home. It’s also good for earning tax-sheltered interest on money without the risk that can come with investing in securities.
Registered Retirement Savings Plan (RRSP)
An RRSP is a government-backed account administered by the Canada Revenue Agency (CRA) that is designed to help you save for retirement. RRSPs are tax-sheltered, which means the investments in the account can grow tax-free. However, the funds will be taxed as income if you withdraw them, and a withholding tax will apply at that time.
RRSPs are a good option for those who want to save for retirement and reduce their tax obligations. That’s because your RRSP contributions may be deducted from your taxable income and ultimately reduce what you owe in taxes.
However, an RRSP may not be the best financial tool if you earn a lower income of around $50,000 per year or less. That’s because you’ll likely still qualify for the same benefits even if you don’t contribute to your RRSP.
Making Learning How To Budget Part Of Your Personal Financial Plan
Learning how to budget as a young adult — and even earlier — will help you acquire the necessary money-management skills needed to ensure you make the right decisions with your money. The sooner you learn these skills, the better.
If done correctly, your budget will help ensure that you properly allocate your money. That way, you’ll always have enough to cover the necessities of life, and hopefully a bit extra to spend on things you want.
50/30/20 Rule
There are a few useful budgeting strategies you can adopt to come up with a sound budget, and the 50/30/20 rule is one of the more popular ones. The premise behind this rule is to split up your take-home income and allocate it to three categories:
- 50% for necessities
- 30% for wants
- 20% for savings
Budgeting Apps
To make budgeting easier, there are several apps available for you to use that take much of the guesswork out of managing your money. These budgeting apps can help you track your money and provide insights on your spending habits. Some of the top budgeting apps in Canada include the following:
- You Need A Budget (YNAB)
- Mint
- KOHO
- Moka
- PocketGuard
- Wally
Include Building Credit As Part Of Your Personal Financial Plan
Your credit score plays an important role in your financial life. A good score will afford you more credit opportunities, which is why it’s important to keep your score as healthy as possible
A credit score is a three-digit figure that represents your credit strength. It ranges from 300 to 900 and is based on the information on your credit report, which is typically derived from credit bureaus, such as Equifax or TransUnion.
Where Can You Check Your Credit Score?
Checking your credit score is incredibly important to building your personal financial plan. You can access your credit report for free from one of the major credit bureaus in Canada to check your credit score. You can also use third-party companies to find out what your credit score is, like CompareHub from Loans Canada.
What Is The Best Way To Build Credit Early?
As a young adult, you may not have built a credit profile just yet because you haven’t used any credit products. But building good credit early on in life is important.
You can establish good credit early on by doing the following:
Take Out A Student Credit Card
If you’re still a student enrolled in a qualifying educational facility, you can apply for a student credit card. Many banks and other financial institutions offer credit cards specially designed for students. They’re generally easy to get approved for, but often have low credit limits. However, with responsible use over time, you can slowly increase your credit limit.
Use A Secured Credit Card
If you can’t qualify for a student credit card because you’re no longer a student, a secured credit card can be a great option. A secured credit card is easier to get approved for than a traditional card because it’s secured by a deposit that you make. In this way, you’re using money you already have instead of spending on credit. Like a regular credit card, you can make purchases and build good credit over time through responsible use.
Use A Credit-Building Product That Reports Your Rent Payments
If you currently rent, you may be able to use your timely rent payments as a way to build good credit. Recently, the Landlord Credit Bureau (LCB) teamed up with Equifax to allow rent payments to show up on your credit report and contribute to your credit score calculation. This is a great opportunity for you to build good credit if you are unable to qualify for other financial products due to a lack of credit history.
No matter which one of the above you choose, it’s important that you effectively manage your debt and maintain a sound budget. Staying on top of your bill payments will ensure that your debt load won’t spiral out of control, while helping you establish and build good credit.
Your Student Loans
Whether you’ve applied for a government, bank or private student loan, it’ll need to be paid back. The payments you make on your student loans can help you build your payment history. Similarly, any missed payments can negatively affect your credit. As such, it’s important to keep on top of your payments.
How To Manage Student Loans
A student loan should be managed like any other credit or loan product. You should have a workable budget that allocates a certain amount of your money toward paying off your student loan. But there are other tactics you can employ to better manage your student loan and even pay it off earlier than the original due date:
- Start paying early. Student loans usually have a grace period which allows you to avoid making payments for a few months after you graduate. But if you can, it might be best to start making payments while you’re still in school or right after. The longer you wait, the more your interest will grow.
- Make biweekly payments. Shifting your payment schedule in this way will result in one extra payment per year. In this way, switching from monthly payments to biweekly payments will reduce your total interest owed and help you pay your loan off earlier.
- Make extra payments. If you took out a private student loan, you may have the option to make extra payments without penalty when you have the extra cash. No matter how big or small the extra payment is, this can help you pay your loan off faster.
Do You Really Need A Car?
As a student and young adult, your income may not be enough to cover the cost of a car. These days, you can easily find yourself paying at least $500 per month or more on car payments. And don’t forget all the other costs that come with owning a vehicle, like gas, insurance, parking, and maintenance.
When creating a personal financial plan, it’s crucial to consider what you really need. So if possible, consider opting for public transit instead. If you live in an urban area where buses and trains are easily accessible, perhaps this would be the best option for transportation. Even though you’re still spending money on bus fare, the cost pales in comparison to the cost associated with vehicle ownership.
Is Your Car An Asset Or Liability?
While a car is considered an asset and can get you to where you need to go faster than public transportation, it can also be a liability. Unlike other types of assets, like real estate, a car depreciates in value quickly. If you’re financing a car and your outstanding loan balance is very high relative to the car’s current value, you can end up with negative equity.
What If You Really Need A Car?
If you decide that you absolutely need a car, then consider the following:
Buy Used If You Can
You can save a few thousand dollars buying used compared to buying a new car. For instance, a brand new 2023 Honda Civic Sedan in Canada currently starts at $28,248.50. But if you check out AutoTrader.ca, you can get a gently used 2015 Civic for just under $17,000. That’s over $11,000 in savings.
Be Smart With Your Financing
Car loans give Canadians a way to purchase a vehicle without having to come up with tens of thousands of dollars in cash to cover the full cost. When financing, make sure you shop around with various lenders to find the most affordable loan based on your credentials.
You can do this quickly and easily by using an online loan aggregator that does all the comparison shopping for you from your computer. From there, you can narrow down your options and get pre-qualified with a lender to find out exactly how much the loan will cost you. Then, you can apply online and get approved shortly after you apply.
Credit Counselling: How To Ask For Help When Debt Becomes Unmanageable
Part of creating a personal financial plan is knowing how to handle debt. If you’re having a hard time managing your debt, you may want to seek help from a credit counsellor. These professionals can teach you how to budget effectively and use credit properly, ultimately with the goal of avoiding sinking deeper into debt and reclaiming control of your finances. For instance, you may work towards lowering your credit card debt or loan interest rates to lighten your debt load and make it easier to repay what you owe.
Credit counselling agencies can also help you come up with an effective debt management plan without negatively affecting your credit score.
Some tactics you may try with the guidance of a credit counsellor include the following:
Debt Management Plan
A debt management plan is a proposal to your creditors made by a credit counsellor on your behalf. This plan involves consolidating your debts into one manageable and affordable monthly payment.
Your credit counsellor will review your situation and come up with ways to effectively deal with your debt. If you choose to proceed with a debt management plan, the credit counsellor will reach out to your creditors and ask them if they can reduce or eliminate your interest or fees, or extend the loan terms to give you more time to repay your debt.
If your creditors accept your proposal, you’ll make payments to the credit counselling agency, which will then pay back your creditors according to your debt management agreement. Keep in mind that while speaking with a credit counsellor won’t impact your credit score, completing a debt management plan will. More specifically, it will show up on your credit report for two years, which could negatively affect your credit score.
Consumer Proposal
A consumer proposal is a formal debt relief process that involves establishing a debt repayment plan with your creditors. This may be the next option if a debt management plan isn’t enough to deal with your mounting debt.
Consumer proposals can only be filed with the help of a Licensed Insolvency Trustee (LIT), who will propose a repayment plan to your creditors. This usually involves either paying a percentage of your debts in installments, extending your loan term, or both. If your creditors accept your proposal, you can proceed to make the agreed-upon payments to your LIT, who will then compensate your creditors on your behalf.
A consumer proposal will stay on your credit report for three years after it’s completed, and as such, may negatively affect your credit scores during that time.
Personal Financial Plan Tips For 18- To 24-Year-Olds
Consider these products and tips to help take your dollar further:
Open A Student Bank Account
Student bank accounts are designed to help students keep more money in their pockets, as they typically have no fees. These accounts also come with perks not found with other types of accounts, including high transaction limits and welcome bonuses.
Apply For Government Student Aid
If you need financial help to cover the cost of tuition for college or university, a government-backed student loan may help. You won’t have to make any payments while you’re in school and will have a six-month grace period following graduation when payments are not required. But after this grace period ends, you’ll need to start making payments.
There are also government grants and scholarships available, which do not have to be repaid like a student loan.
Look Into Student Discounts
Student Price Card (SPC). Students can take advantage of over 450 exclusive deals and discounts with the SPC. Membership costs $10 per year, but this nominal fee will afford you with plenty of discounts on things such as food, clothes, travel, tech, and more.
UNiDAYS Canada. This free discount program gives students access to deals and offers for things like health and fitness, clothing, tech, and subscription services.
The International Student Identity Card (ISIC). Present this virtual ID card to prove your student status and gain access to more than 150,000 student discounts on travel, food, entertainment, shopping, and more. The card costs $20 and is valid for one year.
Start Investing Early
Investing plays a key role in financial planning, as it lets your money grow over time. The earlier you start investing, the more time your money will have to grow.
Spend Within Your Means
It can be tempting to spend every penny you earn, especially when you start working. But it’s also easy to spend more than you make when you have access to credit products. Be conscious of your expenditures and make sure you’re following your budget to avoid falling into a debt trap.
Final Thoughts On Having A Personal Financial Plan
Financial literacy is crucial, and the time to start adopting sound financial habits is now. If you’re between the ages of 18 to 24, today is the perfect time to create a personal financial plan and start learning effective financial skills that will set you up for success in the decades to come.
