Did you know that your weekly avocado toast is standing between you and a secure, stable future? Not really, but that’s a popular narrative being pushed by many “financial experts” to people in their twenties trying to save for retirement.
The reality is that in your twenties, retirement is still years away. You don’t need to scrounge to save every little dime. It’s more than okay – encouraged even – to use your money for food, travel, and other new experiences. But if you do it smartly, you can also start saving for your retirement with little time or money.
We get that thinking about retirement while you’re still in your twenties is daunting, but it’s essential to start early to give yourself the best chance for a comfortable future. Here are some tips to help you get started:
Start saving now
The sooner you start saving, the more money you will have for retirement. And it doesn’t have to be a lot! Investing even small amounts each month can mean significantly more money for you a few decades down the line. Because of compounding interest, starting in your twenties will let your finances grow and grow.
Make a plan to dedicate fifteen, ten, or even one percent of your paycheck to your retirement each month. This might feel like a lot in your twenties, but your future self will definitely thank you for it.
Use government tools
The Government of Canada has several tools to help you plan for your future. One of these is the Tax-Free Savings Account (TFSA). TFSAs are saving accounts that can hold cash, guaranteed investments, index funds, and more. As the name suggests, money can be withdrawn from a TFSA without being taxed. Unlike some other funds though, you won’t see immediate income tax deductions for contributions.
A Registered Retirement Savings Plan (RRSP) allows you to put money away specifically for retirement, with some exceptions for bigger purchases like your first home. In the case of an RRSP, you won’t pay income tax on your contributions when you make them, but you will be taxed when you withdraw the money after you retire. Presumably by then, you’ll be in a lower tax bracket than during your working years, so it’s still a beneficial place to save.
Both of these accounts seem incredibly complex. And there are many conflicting opinions about what option is best. The reality is that only your accountant will be able to help you decide which option is most suited to your goals, or how they can work for you in tandem.
Avoid unnecessary debt
Don’t worry; you aren’t here to be lectured about how all debt is bad. Student loans were necessary to get your education. Cars are expensive, but you need one to get around. Expenses are a part of life, and sometimes that means having debt. The key is finding low-interest lending options and avoiding going into unnecessary debt.
High-interest credit cards are one form of debt that can eat away at your retirement saving goals. It’s likely your twenties are the first time you have had access to a card with a high credit limit. In Canada, most student cards only offer a limit of around $250-$1000 – still potentially dangerous but easy enough to pay off. Once you enter the workforce, you’ll be offered cards with much higher limits. The catch is that these often come with super high interest rates. Forgetting to pay a bill just one time can result in massive fees. And it can be easy to fall victim to the slippery slope of living above your means with a high-limit card in hand.
Another form of debt that many twenty-somethings are wracking up is through buy-now-pay-later apps like Afterpay and Klarna. These allow you to purchase high ticket items and pay them off over the course of a few weeks. Apps like this can help you avoid high interest rates and buy items you could not otherwise afford, but missing payments can result in extra charges and even impact your credit score.
Keep expenses low…but don’t sacrifice your life
Just to reiterate, this isn’t a financial lecture. Keeping expenses low doesn’t mean eating ramen noodles every night and saying no to nights out with your friends. It just means not blowing paychecks and bonuses on impulse buys or being tied to high cost subscriptions. Say goodbye to one or two splurges a month and put that money into your retirement accounts instead.
If you are spending too much money but aren’t sure where it is all going, it may be time to talk to an accountant. They can take stock of your expenses and give pointers about how to save more money.
The reality is that these days spending money is pretty much unavoidable. Inflation is up, and rent prices are soaring. A chartered professional accountant will be able to find tax breaks, incentives, and other programs designed to help young people thrive.
Saving for retirement in your 20s doesn’t have to be a punishment that means sacrificing all of the things that make this time in your life so special. There is no need to be putting vast amounts into savings accounts now. Even starting a plan that means tucking away a small amount from each paycheck can go a long way towards building a healthy portfolio that’s ready for you at the end of your career.
To further your retirement saving efforts, contact an experienced accountant who can help you develop a reasonable savings plan. They will offer advice on what accounts are best for you and help you decide how much you can sacrifice from monthly paychecks. An accountant can even help you find money you didn’t realize you had.
If you’re ready to safeguard your future, contact MMT Chartered Professional Accountants today!
