After college, it's time to budget

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Sara and Joel admit that while they're "book-smart" - they have six degrees between them - they lack even a basic understanding of money and investing.

Sara, 28, is a librarian. "I just graduated in April and for the first time have a real job making enough money to cover the bills," she writes in an e-mail. Joel, 31, is working on his PhD in archaeology, living on government grants and university scholarships.

"We would both really appreciate some advice on how to start saving and investing money now that we both pull in a salary and our student loans are almost paid off," Sara writes. Their goals include buying a house, starting a family and landing a professorship for Joel after he graduates next year. "We aren't sure where to start."

We asked Keith Copping at Vancouver-based Macdonald, Shymko & Co. Ltd., to look at Joel and Sara's situation. Macdonald, Shymko is a Vancouver-based fee-only financial planning and investment counsel firm.

What the Expert Says Sara and Joel should be proud of their accomplishments, Mr. Copping says. "Many people in their situation, with such a long pursuit of post-secondary education, would still be burdened with huge student loans, car loans, credit card balances for many years."

His first suggestion: Keep it simple. The key is to focus on the main objective - identifying savings capacity and living on a budget. Sara estimates their savings capacity at $2,100 a month, about a third of their net income.

The main obstacle to planning at this point is the couple's uncertain future. When Joel graduates, he will look for a teaching job, which could take him anywhere.

What Sara and Joel need most is to build an emergency reserve, Mr. Copping notes. He suggests six months' expenses (six times $4,225) or $25,350. This money could be in tax-free savings accounts or regular savings or investment accounts in highly liquid securities such as cashable GICs or money market funds. RRSP savings should not form part of this emergency fund because of the tax consequences of making withdrawals.

Mr. Copping identifies one major disconnect. Sara and Joel have been investing some of their savings in stock mutual funds, which are long-term investments, while their financial goals have a horizon of two or three years at most.

"The focus for now is on saving the money, not investing to try and earn high returns."

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If they move, Sara will have to give up her job. Indeed, they may have to move more than once if Joel has to take short-term teaching jobs before he lands a permanent post. "Building savings now will help make this possible."

Sara should make maximum RRSP contributions now but Joel should not because he has no taxable income. The couple is considering using RRSP money for a down payment on a home under the government's homebuyers' plan - assuming they stay in Canada. Their target house price is $250,000 to $300,000 some time in the next two or three years. Mr. Copping suggests they save enough for a 20-per-cent down payment ($60,000) so they do not have to pay fees for a high-ratio mortgage loan.

They have $43,000 of savings now, but assuming they set aside $25,000 as an emergency fund, they have only $18,000 earmarked for a house purchase. So they need to save $42,000 over the next two or three years.

Sara and Joel face a number of challenges. When they move, Sara will have to give up her secure government job with its pension and benefits. It may take time for her to find another job in a new city and she may have to settle for less income. The dream of buying a home may not make sense if they have to move two or three times over the next few years. "For a short-term move they will likely be better off renting," the planner says.

Starting a family, another of their near-term goals, will add to the challenges - "and of course the rewards" - because Sara will likely take time off for maternity leave.

Sara wonders if they are saving enough for retirement. Forget about it for now, the planner says. Focusing on retirement savings at this stage is "not realistic," he says.

"However, the financial habits they develop now will have a huge impact on their future retirement. Live on a budget, pay yourself first, save for purchases, do automatic RRSP contributions, will develop good habits for later."

Client Situation

Special to The Globe and Mail