Monday, August 25, 2008

The Roaring Twenties

Although I'm nearing the end of this decade of my life, I have learned quite a bit about finances, investing, taxation and myself during these years.

My twenties did not go exactly as planned when it came to my finances. In retrospect, I realize that I spent more of my money on frivalous things than I should have, and this has probably deferred my ultimate goal several years. Only in the last two years, with the coaxing of my wife, did I really arrange my finances in a more effective way. Sure, I enjoyed the care-free and worry-free lifestyle, but only now do I realize that I could have balanced this with some sound financial decisions. The last couple of years have been most beneficial: I have begun the process of catching up on past years' RRSP (IRA) contribution limits, have realized the value of asset allocation, and have emphasized paying down my mortgage as quickly as possible.

For those of you starting your own path to riches, if you are in your twenties, I only have two major suggestions for you. First, enjoy yourself! While money is an important aspect in life, so are the memories of life. Go out there and search the world, your city, and your neighborhood. Learn as much as you can about the things around you. Life is too short to worry all the time, but always keep mind of my second suggestion: start saving inside and outside your RRSP (IRA) accounts.

It's important to save for your long-term future, but it is also important to build your nest egg for important decisions in your future, like homes, marriage and children. Savings and liquidity are the key to an financially free future.

The best way to start your savings program is to simply "pay" your savings and retirement accounts on a weekly, biweekly or monthly basis, as though it were any other bill. More importantly, you need to avoid cashing out your savings at all costs, as they are not there for day-to-day spending. By socking away at these two plans, you will save for both intermediate and long-term goals. The funds in your non-retirement accounts should only be used for life-changing events, like the purchase of a home, preparation for your marriage or covering the initial costs of bringing a child to this world. If you already have a home, are already married, or have children, these additional savings can provide the seed monies to an emergency fund, or can be used to build your retirement egg even faster.

The key to this type of savings is also to constantly save in this way during your lifetime. In future decades, you will expand on this savings program. By saving up front, you will be forced to reduce your spending, in favour of your automatic savings. I suggest that you commence with saving of 5% inside your RRSP and 5% outside your RRSP. This level of savings will allow you to still enjoy the early years of adulthood. As you grow accustomed to this savings rate, you can consider giving yourself a raise, and increasing your savings rate. In future posts I will discuss asset allocation, tax issues, etc., as I have encountered issues, etc.

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