When you are in university you have a lot going on. Between the midterms, weekly readings, assignment deadlines, finals, and dollar-beer night at the campus pub there isn’t much time to focus on saving for the future. Even just saying “saving for the future“ as a student carries with it the distasteful connotation of being a grown-up and dealing with the responsibilities of life after university.
However, there is one trend that affects the majority of university graduates and forces them into the proverbial real world almost instantaneously after graduation. That trend is student debt.
Student debt rates have been increasing over the years alongside tuition. This puts added pressure on recent graduates to find a job, even if its not really what they would like to do. That is a depressing thought given how hard students work to earn their degree in hopes that they will be pursuing a dream.
There are, however, a few things that students can do during their studies to cushion the blow of student debt repayments after graduation, hopefully helping them avoid settling for an unwanted job.
Yes I know, this seems like a very obvious tip, yet it is very difficult to execute when trying to balance a full-time university course load with a part-time job… or two. One thing you can do is ensure that you save a substantial amount during summer break.
A summer job is crucial to a student’s financial standing. The problem lies in saving enough money to get you through the school year stress free. With so many activities pulling at your financial attention in the summer it is absolutely necessary to build a budget and understand your financial needs during the school year. Although the cross-country road trips, bar nights, vacations, and endless outdoor musical festivals are enticing, make sure the first thing you are doing with your summer income is contributing to a savings plan of some sort.
Utilizing a TFSA
A Tax-Free Savings Account (TFSA) is a great financial tool for students. It is simply a bank account that allows you to save money and grow your investments without incurring capital gains tax. You can easily open a TFSA at your local bank branch. There is, however, a contribution limit associated with every individual’s TFSA, but it is unique to that person’s age and previous contributions. This may sound complicated but it is actually fairly straight forward and will be covered in a future post that breaks down the difference between an RRSP and a TFSA.
So, how can a student benefit from a TFSA?
Well, a TFSA allows you to save money and grow your investments without capital gains tax. Thus, it is a great way to save a portion of your summer income and invest it in in low-risk securities such as treasury bonds. You can also sit down with a Financial Planner and come-up with a balanced portfolio of mutual funds that suits your risk tolerance.
How much should you save?
Well, this depends on a few factors. You will want to make sure you pay-off any outstanding credit card debt first, as this incurs significantly high interest payments. After paying down this high-interest debt try starting by saving 10% of your summer income. If you feel like you can save more then great! Go right ahead! Furthermore, if you saved enough liquid cash to cover your school year expenses then you can save a significant portion of any part-time job income you gain during your semesters of study. The idea here is that your consistent savings will be invested in low-risk investments that will leave you with an increased amount of capital upon graduation. You can then use these savings to make a large initial repayment against your student debt.
Here are some general guidelines to help you utilize the TFSA and save:
- Work full-time in the summer and at least part-time during the school year
- Pay-down high-interest credit card debt ASAP
- Regularly contribute to your TFSA every pay
- Sit down with a Financial Planner to determine a low-risk investment strategy to grow the value of your savings
- Upon graduation, use these savings to substantially lower your outstanding student debt
Trying to save while balancing the demand of your expenses with a full-time course load is a challenging feat. However, with proper planning, building a budget, capitalizing on your higher summer income, and utilizing a TFSA you can put a dent in the looming student debt interest payments waiting for you after graduation.
Breaking The Trend