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Spend your paycheque wisely


After years of struggling to make ends meet as a starving student, you’ve landed a job and can’t wait to start earning a real paycheque. That sports car or posh apartment may be tempting, but if you’re saddled with student loans, you should set a budget before making financial decisions you could regret.

“Don’t commit to anything until you’ve had your job for several pay periods,” advises Debby Fowles of financial planning guide. New grads often make commitments based on their gross annual salary and are shocked when they see their take-home pay. “Sometimes they’re already in trouble by that time.”

Creating a budget or “spending plan” will help you pay down debts quicker while managing your living expenses and even saving for the future. “It’s a tool, not a financial handcuff,” Fowles says.

Begin by taking a hard look at your discretionary spending such as cellphone packages and expensive jeans, and non-discretionary expenses such as food, rent and transit pass, advises Alexis Mantell of RBC Royal Bank in Toronto. Consider booking an appointment with your bank representative to talk budgeting strategies.

Cash flow

“Financial planning should revolve around cash flow,” Mantell says. “Determine a monthly student debt re-payment amount that will allow you to live comfortably while making a significant dent in your debt load. Synchronize your loan payment date with payday to ensure it always gets paid off the top.”

Look for ways to reduce your cost of borrowing. If you’re carrying a credit card balance each month, or you’re short of cash and have overdraft protection on your bank account, consolidate all debt into the vehicle with the lowest rate of interest — likely a line of credit.

Set a goal. “Determine a time line for completion of repayment. Set aside a small fund to reward yourself for meeting that milestone,” Mantell says. Your payment period will depend on the amount of debt outstanding and how it’s negotiated.

“For some, this may take a matter of months; for others it could take 10 years or more,” Mantell says. “A single working professional may set a more aggressive goal of debt reduction than a recent graduate who is newly married with an infant.”

Having difficulty making payments? You may be eligible for interest relief. If your application is approved, the government will pay the interest on your student loan for a period of time, typically six months, but possibly as long as 36 months, Mantel says.

You may be just embarking on a long career, but there’s no better time to start contributing to a Registered Retirement Savings Plan (RRSP). “Even with a small contribution, you not only reap the benefit of receiving a receipt to lower your taxable income, you will also realize the impact of compounded growth on your contributions,” Mantell says.

Contribute just $1,000 a year to your RRSP and you’ll have nearly $1.2 million by the time you’re 65 (based on an annual return of 10% and indexed at 3% per annum).

“For the equivalent of one late-night pizza delivery a month, that $25 can grow into a sizable nest egg — one that can serve as an important downpayment towards a first-time condo,” Mantell says. “Up to $20,000 from an (RRSP) fund can be used tax free for a downpayment on a first home.”

Reducing your debts will motivate you to keep going. “This is a very pivotal time for young people,” Fowles says. “It’s the basis for their future. This is when many young people get into trouble. If you begin with bad habits, it can literally take 30 years to pay off your credit card debt. Lay a good foundation.”

Want to pay less interest?

RBC Royal Bank offers the following tips:

– Pay cash or use your debit card whenever possible.

– Use your credit card only if you can pay your balance in full each month by its due date.

– If you can’t pay the full balance, make the minimum monthly payment by the due date. You’ll pay less interest than waiting to pay the balance in full after the due date. Late payments can adversely affect your credit history.

– Choose the credit card that fits your needs; for example, if you don’t routinely pay off your balance in full each month, select a card that charges the lowest interest you can find.

– Use a line of credit rather than a credit card for ongoing purchases — it typically carries lower interest rates.

– Pay off higher-interest debts first.