Financial Tips for Young Adults: Conventional Wisdom is Wrong!
How many times have you heard the phrase ‘your home will be the greatest investment you’ve ever made’ or ‘paying off your mortgage early is the first step towards financial security’? I have heard this advice from most parents to their children and see these general guidelines repeated over and over again in newspapers and articles on various internet sites. They are propagated because they are ‘safe’ guidelines that will save the author from ridicule or represent the life experience or value system of most parents. It’s easier to go with the flow than against it, and it’s easier not to take financial risks in life. Well, if you want to achieve financial success in life, IGNORE that traditional advice. If you want to be financially successful, you need a different strategy.
Historically, those who have embraced this conventional wisdom about paying off mortgages have entered retirement with a house paid for and little money to spend on a lifestyle. If you want to take a 70% pay cut in retirement, follow that advice. If, on the other hand, you want to enjoy an active and entertaining retirement, read on.
The biggest investment you NEED to make in your life is financing your retirement. The median home price in the GTA (Greater Toronto Area) is approximately $486,000 in 2011 according to the Toronto Real Estate Board. Now compare that figure to the amount needed to finance an annual income of $50,000, assuming an inflation rate of 2.5%, over 30 years of about $2.2 million. You have the photo?
Now, this doesn’t mean that you ignore your mortgage balance completely and pay only interest, it means that since you will receive a lifetime shelter in your home, you can spread the cost of this shelter over the standard 25-year amortization. More importantly, BEFORE you decide how much home you’d like to own, you should base your decision on 80% of your take-home pay. My experience as a financial advisor has shown that most people can’t save enough because they bought too much of a home when they first got married. This placed them behind the proverbial 8-ball and restricted their ability to accumulate wealth.
To ensure that you accumulate wealth and have enough to fund your retirement, the first 20% of your monthly income should go toward retirement savings (18%) and various forms of insurance (2%) to protect you from various health risks. life. , critical illness and mortality. Also, make sure you start with a 25% down payment not only to save on your government mortgage insurance, but more importantly, to make your mortgage payments more affordable and to provide a cushion of equity in the value of your home.
In Canada, only 5% of the population earns more than $100,000 per year or more, so if you want to achieve a financially successful lifestyle, you need to take advice from those who comprise that small group. Even better, take it from the even smaller group that earns over $250,000 per year. This elite group of income earners is made up primarily of college graduates and, to a lesser extent, entrepreneurs. Small business owners make up a large portion of wealthy people, and having a college degree increases someone’s chances of success for one’s small business. You can still run a successful small business without a college degree, but the odds are stacked against you and you need to be highly motivated, resourceful, and focused.
When you graduate from college, if possible, live in your house for two years to build up a sufficient down payment for your first home. Save diligently during that period and invest it wisely by seeking the guidance of a competent financial advisor. At the same time, the first 20% of your paycheck should be invested in long-term wealth accumulation, as noted above. If you can’t live at home, then consider sharing a place with a friend or family member on the assumption that the arrangement will be limited to two years so you don’t have a chance to mess up the relationship.
There are three components to wealth accumulation: savings, rate of return, and time. Of these three, ‘time’ is the most critical element because it is what allows you to capitalize on your wealth. Albert Einstein considers the compounding of his investment returns to be the eighth wonder of the world.
One last thing, stop procrastinating, the time to act is not tomorrow, but today, so go start!
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