L Qivcre Frugal Fun: Spending is a financial faux pas What students don’t know about finances could be costing them thousands of dollars during their education. Knowlton Thomas TSFA. RRSP. GIC. While today’s youth is used to acronyms in daily speak—LOL, TTYL, and the like— they are regrettably unfamiliar with ones that could be maximizing their long-term finances. Students are notoriously debt- laden. You might think it’s the worst time to try your hand at investing or spending money. But college-goers have one unparalleled advantage by default: they’re young. And the younger they are, the more time the financial seeds they plant have to grow. Problem is, though, they don’t plant seeds. They drink away their chore money and invest their part- time job earnings in making sure they look opulently juvenile with heart- shaped shades and designer-ripped denim. Now, don’t get me wrong here. These aren’t crimes and your youth should be spent doing what you love. But not preparing for the future will bite you in the ass once you graduate, when the real world walks up to you and slaps you in the face. What students don’t seem to know is that it’s actually really easy to be financially responsible without giving up all their spare dough. Investments seem complex, and in many aspects they are, but there are still a few relatively simple ones designed to make the most of your money: 1. TSFA. Introduced at the beginning of 2009, the Tax-Free Savings Account is an excellent place to put your money. It has a lot of regulatory complexities because it’s government-managed, but, in a nutshell, you can deposit up to $5,000 per calendar year into this account. Why would you? First, it typically carries a high interest rate, higher than your average savings account. Second, it doesn’t lock up your money, and there are no penalties for withdrawing from it should you find yourself in a crunch. Third, it doesn’t just store cash; it can store a wide range of investments, and shelter them from return-eroding taxes (I'll 12 get to this in a second). 2. RRSP. Introduced several decades ago, the Registered Retirement Savings Plan was provided to Canadians as a tax relief account for those wanting to save for retirement. It’s similar to the TSFA in that it can hold a variety of investments and shelters your money from tax erosion, though its regulations on deposits and withdrawals are different. 3. GIC. A Guaranteed Investment Certificate is an investment where you lock your money up at a bank for anywhere from one to ten years, and the bank pays you an annual percentage in profit. The return rates for GICs are generally lower than investing in stocks or mutual funds, but they’re safe—so safe, in fact, that a GIC absolutely guarantees you will not lose a penny, and most guarantee fixed profits. There are also more complex ones, such as ones which tie themselves to certain stock markets, but always guarantee your initial investment. GIC’s typically start as low as $500, and when invested inside of a TSFA, ensure your savings against both inflation and tax erosion. You might not have this kind of money on hand, so it can be a clever idea to use interest-free student loans as leverage, meaning you use your debt to invest, knowing you will yield a profit. But if you’re new to the game, walk on the side of caution. Talk to your financial institution about the stagger effect, alternatively called the ladder effect, where you build up multiple GIC’s that begin and mature on a varied annual rotation; this effectively takes advantage of rising interest rates without trapping all of your money in a single investment. Note that the longer you put a GIC in for, the higher interest rate it will yield. And keep in mind that big banks almost always provide the lowest rates of return for accounts and investments— try a credit union, or online-based institution like ING Direct. So how do you make use of these features? There are a number of ways, but let’s keep it simple. Most banks and credit unions offer a helpful service, known as pre-authorized money transfers, at no cost (never pay for this service). What this means is you can set up a system that will automatically take a small amount of money from your bank account and put it into an RRSP or TSFA every week, two weeks, or every month. It’s up to you to figure out how much you can afford to put out, but as little as ten dollars per week means you could have $3,000 or more by the time you graduate, and trust me, you’ ll hardly notice it was ever gone. Ripped jeans today, or a million-dollar retirement fund down the road? oe . Combine small, but frequent, deposits into an RRSP and a TSFA, and either leverage student debt or extra cash to invest in a GIC (within your TSFA), or just wait until your pre-authorized money transfers have collected enough money to become a GIC. You’Il be surprised how quickly that happens. Time is on your side. A dollar a day goes a long way down the road when three-quarters of your life remain. For (very) little sacrifice today, you’ll gain a lot later. Now get to it.