In January we talked about Finance Tips for the Millennial. In this week’s post, we dive into the next financial life stage.
There are 5 general financial life stages, that occur in the following order: Early Earning Years (20-30), Family Commitment Years (30-45), Peak Earning Years (40-55), Pre-Retirement Years (55-65), and Retirement (65+).
Note: There are always exceptions to the rule.
Around the time we turn 30, a lot of things tend to change. Often times, this is when people start settling down and get married, are more established in their careers, and are starting families.
At this point in a person’s life, there can be some rather large expenses. The cost of buying a house and paying for a wedding are usually 2 of the largest expenses in a person’s life up to this stage.
Hopefully, they are well established in their career by this point and the increase in earnings offsets these larger purchases.
With this in mind, let us look at some finances tips for the young parent.
Note: you do not have to be a parent for these tips to apply.
Don’t Touch Your Savings
Assuming that all the advice was followed from our previous blog post Finance Tips for the Millenial, at this point there should be a decent chuck put away in savings.
Life situations change, and they can alter the path to reaching your savings goals. Hopefully, you have sat down with your financial advisor and devised a savings plan.
In a savings plan, you should define exactly how much money is needed for different goals, and how much needs to be put away to achieve those goals.
For people entering family commitment years, their short term goals will be: paying for a wedding, buying a house, upgrading their car, or going on a vacation. However, long-term goals may long a lot different (i.e., retirement, building a dream home, saving for kids educations).
When we say that savings should not be touched, what we mean is, don’t touch your long term and retirement savings.
This is where creating a savings plan is important. Without one, you may not know how much needs to be saved to meet long term savings goals.
The more disciplined a person can be in leaving their long-term savings untouched, the more power compounding interest has. You can find more information on compound interest here.
Set up RESP’s
This step is not applicable to everyone. However, those that have kids already or are planning on having kids, this step can be extremely beneficial.
Registered Educations Savings Plans (RESP) can only be opened once a child is born. Once opened, there are two main benefits; the Canadian Educational Savings Grant (CESG), and Income Tax Benefits.
Canadian Educational Savings Grant (CESG) is a grant provided by the federal government. The government provides a grant of 20% for every dollar contributed, up to a max contribution of $2,500. So, if $2,500 is contributed, the government will provide a $500 grant.
More than $2,500 annually can be contributed, however, after that, the maximum grant is received the benefits are minimal.
Tax benefits for RESP are different than for other registered accounts. Any increase in value on the contributions in an RESP, as well as the government grant, is taxable in the hands of the beneficiary (a.k.a. the child), rather than the contributor. This is very beneficial to high income earning parents or contributors.
Instead of gains be taxed at the parents or contributors marginal tax rate, they are taxed at the beneficiaries marginal tax rate (which is usually a lot lower, especially if they are a student).
On top of parents being able to open RESP for their children, Grandparents and other relatives can also open an RESP. In order for it to be opened under other relatives, the primary caregiver (i.e., parent(s), or guardian) is required to sign off.
Budget and Track Finances
This was mentioned in our previous blog post, but can not be stressed enough. As life progresses (i.e., marriage, children, mortgage) tracking your finances becomes a little more challenging but even more crucial.
As a single person tracking finances can be quite simple (only one income stream, and only one person doing the spending), but as more income streams, expenses, and accounts get added it becomes more complex.
Ideally, you have years of experience budgeting and tracking your finances before you reach the family commitment years. If not, it is never too late to start.
We here at Forbes Wealth Management have created a detailed expense tracking spreadsheet, that we would love to share with you. For more information or to get a copy of the spreadsheet, do not hesitate to contact us.
Along with these tips, the tips from our previous blog post are worth reading and applicable in most cases.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy.