Starting a career is an exciting time for a young woman. It’s the start of a new life chapter, and in many cases means moving from part-time work, or a minimum wage job, to a much bigger paycheque.
Scott Hannah, CEO of the non-profit Credit Counselling Society, says that once the money starts rolling in, young women should identify some long- and short-term financial objectives and develop a savings habit early on.
“What happens is, they go from maybe being in school working part-time and they’ve had to sacrifice and were living very, very modestly,” Hannah says. “And now they get this paycheque … and they immediately want to upgrade their lifestyle, move to a nicer place, buy a car, and before you know it, they’ve completely maxed out their paycheque and lack the ability to achieve any financial goals.”
Hannah says emergency savings equal to three to six months of living expenses should top the list of financial goals.
“When you’re first starting out things can happen,” says Hannah. “Maybe your job doesn’t work out and now you’re laid off and you have a student loan debt. You don’t want to fall behind in those payments. It would be important for a person to work towards that amount in a two to three year period.”
Another financial goal for many post-secondary graduates is paying off student loans.
“I would encourage most people to try to pay off their student loan earlier rather than later because it’s hard to get ahead in life carrying consumer debt,” Hannah says. “So while most student loans are amortized for a 10-year period, ideally, you want to focus on paying that off within three to five years.”
Using things such as pay increases, bonuses and tax credits wisely can help achieve those financial goals.
“All too often, when a person gets an increase in pay, it just gets absorbed in spending,” Hannah says. “They don’t say, ‘Well I didn’t have this extra $100 on my last paycheque, so I won’t miss it if I set it aside.’”
Hannah suggests splitting increases or bonuses 50-50 between lifestyle spending and financial goals to create balance.
Though most young women in their early 20s aren’t thinking about retirement, Hannah says it’s a good idea.
“Saving for retirement at that age may mean that you only have to save 10 per cent of your pay, and especially if you have an employer match, it can really turbo-charge your savings,” says Hannah. “For those who put off retirement savings until they’re 40, they’re likely going to have to commit 20 to 25 per cent of their gross pay in order to build sufficient retirement savings.”
Misusing credit cards can quickly get anyone into deep debt, not only those just starting out. Hannah suggests having no more than two credit cards, and not getting caught-up in a cycle of making only minimum payments.
“You should never spend on your credit card what you can’t afford to comfortably pay off the next month.”
