Why the TFSA may be just the ticket to help Gen Y save

Break out the piggy banks: 34 per cent of Gen Y–ers say it’s almost impossible to save money, according to TD Canada Trust.

The new research found that young people today are facing financial challenges that older generations never had to worry about, like working to pay off obscene amounts of student debt while at the same time getting by on lower salaries.

“There are some tough challenges that make it a real struggle for this group to save,” says Sona Mehta, vice president of Everyday Banking at TD Canada Trust. “But there are also lots of ways to meet those challenges.”

The research, which surveyed Boomers and Gen Y on their ability to save in their 20s, found that today’s youth appear to be more affected than previous generations by common obstacles to saving, such as:

• Paying for education costs (44 per cent of Gen Y versus 18 per cent of Boomers)

• Salaries too low to cover living expenses (39 per cent of Gen Y versus 30 per cent of Boomers)

• Debts from credit cards, loans and lines of credit (38 per cent of Gen Y versus 26 per cent of Boomers)

• The temptation to shop beyond their means (36 per cent of Gen Y versus 16 per cent of Boomers)

Financial experts agree that the time to start saving is now, and that even seemingly small amounts set aside will make a difference in the long run. Tax-free savings accounts (TFSAs) in particular could be just the ticket to helping Gen Y save.

“Your money is working harder for you [with a TFSA] because you’re able to tax-shelter it,” Mehta explains. “There’s a lot of flexibility. You’re growing it tax-free, and should the time come that you need to take money out, you can do that without any tax implications.”

John Sanchez, investment advisor at Toronto’s Richardson GMP Limited, notes that TFSAs have the potential to be a very powerful tool for young Canadians, especially given their less-than-robust income.

“It is typically a good idea to save RRSP contribution room for later years when your income is expected to be higher,” Sanchez says. “A TFSA is generally the better starting point in this case. A simple strategy is this: save in a TFSA during lower-income year and cash it out later on to make an RRSP contribution when income is much higher.”

There are lots of other ways for today young’uns to conquer their financial fears.

Save systematically
It’s not enough to say “I’ve got to start saving some money.” Rather, Mehta suggests automatic withdrawals. “It can be weekly, biweekly, or monthly; transfer a set amount into savings account,” she says.

Have specific goals
Gen Y wants clear guidelines on how much to save. For starters, aim to have three to six months of living expenses set aside in case of emergencies. How?

“Save 10 per cent of your pay cheque,” Mehta says. “If you make it a habit and put that away, you’ll get to that three-to-six month [safety net].”

Focus on what you can control
“Establish a budget of fixed expenses for necessities such as rent, food, loan payments and transportation,” Sanchez says. “If you have debt on credit cards or a line of credit, you should structure your finances to begin paying down your outstanding balance. Add these payments to your fixed expenses. The goal is to be able to pay outstanding balances each month and eliminate high interest charges.

“Once you calculate your budget look at what is left over each month and establish a fixed amount for shopping and leisure,” he adds. “This will help avoid the “shopping beyond my means”.

View debt reduction as a form of savings
“As a simple example, you may have decided to allocate some of your income to a savings account which might only earn you 2 per cent per year. At the same time, you are carrying credit card debt which is costing you 12 per cent per year. By saving instead of paying down debt, you are essentially losing 10 per cent per year, a very tough way to save indeed.”

And as a fringe benefit, Sanchez notes, you’ll have established the good habit of allocating a portion of your net income to debt reduction with each pay cheque. “Once the debt has been repaid,” he says, “you can continue setting that amount aside as savings.”