Foresters does not give legal, tax, financial planning or estate advice. The opinion or advice expressed herein is the opinion or advice of an independent financial advisor on a specific situation. Please contact your advisor to discuss your specific circumstances.
Things to know
Situation: Felix is in the third year of his accounting program at university. During the summers he works full-time as a camp counsellor and he’s usually able to save a good portion of those earnings for school.
During the school year he works part-time at the bookstore. Also, each year Felix’s parents contribute $6,000 towards his tuition. He’s been taking student loans to pay for the remainder of the costs.
Financial confessions: Being an accounting major, Felix has a pretty good mind for numbers, so he’s well aware of the “small” credit card debt he’s accumulating each month at school.
He mostly attributes this to his “low-paying” part-time job and a bad habit he’s developed of frequently picking up the tab for his broke friends at pub nights.
He says his parents are very nervous about the approximately $25,000 in student debt he will have by graduation. They were always against the idea of him going to school out of town because they knew they wouldn’t be able to afford his housing, but Felix was adamant about getting the full university experience.
Annual school savings
|Annual savings from summer job||$6,500|
|Annual tuition help from parents||$6,000|
|Annual money available for school||$12,500|
Annual school expenses
|Student meal plan||$2,500|
|Books and supplies||$900|
|Cost of train trips home||$800|
|Annual student debt/loan debt||$7,200|
|Total student debt (so far)||$14,400|
Monthly income during school
|Part-time job during school||$13/h * 12h per week|
|After-tax monthly income||$530|
Monthly expenses during school
|Off campus meals/ groceries||$150|
|Going out with friends||$225|
|Remaining credit balance||$-110|
Financial goals and dreams:
- Down with debt
- Felix heard the average salary for an accountant is $62,000. So he’s confident that once he starts making that salary after graduation he’ll be able to pay off his student debt in two or three years.
- Once in a lifetime trip
- A student group is going overseas during reading week to help build affordable housing. Felix really wants to go but doesn’t know where he’ll find the $1,200 for the trip. He’s considering putting it on his credit card and then paying it back over the summer.
- Big city living
- Not wanting to move back home, Felix is already daydreaming about the condo he plans to buy right after graduation. But being so young he also knows he’ll have trouble qualifying for a mortgage, but he assumes his parents will co-sign with the bank since he’ll be paying the mortgage payments anyway.
Q: What’s your philosophy when it comes to helping people like Felix with their financial planning?
A: I always start off by telling my clients that I’m not here to judge. I want them to feel free to spend their money however they like, but they need to be aware of what they’re doing. I just try to help people take a step back and prioritize their goals. Then we figure out how to allocate their money so that they’ll achieve the goals that are most important to them.
Q: What’s the first thing that jumps out at you about Felix?
A: Well he’s certainly a bit of a dreamer. But that can be a good thing. Everyone needs dreams to accomplish things, right? He seems like a nice guy but he needs to start being a bit more realistic. Most importantly, he needs to fully understand the dangers of debt and bad credit scores.
Q: What has you concerned about Felix’s credit debt?
A: Well in general debt is bad. Debt is very bad. In fact, I’d say the only exception to this is for education or a mortgage because those investments will benefit you financially in the long run.
Q: But to be fair, he says he’s “aware” of the credit debt he’s racking up.
A: He says he’s aware but he may actually not be. As a student, his credit card interest rate is likely 20% or higher. It also seems like he’s only making minimum payments.
If you look at any credit card statement it will tell you the estimated time it would take to repay your debt if you only make minimum payments. Let’s say he owes $2,000 by graduation, if he continues to make minimum payments it would take him 20 years to pay it off! It’s like compound interest in reverse.
Q: So what can he do to start fixing this?
A: With his cash flow there are two things he could do. Increase his income (which is difficult) or decrease his spending. By limiting his spending he can start to get rid of his credit debt and improve his credit score.
Basically he needs to stop always being such a nice guy and buying drinks for his friends. Let them take a turn! Maybe his friends aren’t broke. Maybe they’re just too smart to spend money they don’t have.
Q: What can he do to set himself up for financial success in the future?
A: He might be getting his hopes up too high for his first salary. $62,000 may be the average for accountants but he probably won’t be making that right away.
But if he wants to improve his chances of being hired and making a good starting salary, he may want to try to find a part-time job in his field instead of being a camp counsellor again. That would help him gain more relevant experience.
Finally, he should start saving 10% of every paycheque towards long-term savings. Developing that good habit now will help him down the road.
Q: Felix certainly seems to think buying his own condo after graduation is realistic. Do you agree?
A: Actually I think he will have trouble qualifying for a mortgage. If he’s only paying the minimum on his credit card right now then he’s not showing good credit habits and the bank will see that when he applies for a mortgage.
Q: Okay sure, but if his parents co-sign the mortgage won’t that fix everything?
A: (laughs) Well if I were his parents I wouldn’t co-sign, just based on his attitude towards debt right now. Plus if he isn’t able to make his condo payments in the future, they’ll be on the hook.
Felix, like many students, may not have a firm grasp of his parent’s finances. He’s just assuming they can afford to help him, but that’s a leap of faith. I usually encourage parents to share their household budget with their kids. That information shouldn’t leave the house, but it will help children develop financial awareness.
Q: Wait, does that mean no condo for Felix!?
A: I totally understand where he’s coming from about wanting his own place. When I was his age I felt the same way. But honestly… suck it up, buttercup! If your parents are nice enough and willing to house and feed you for a while, then take it!
He’ll need the time to pay off his debt and save for a down payment. There are lots of costs to consider when purchasing your first home. He may not realize that without a 20% down payment for his condo, he’ll be subject to Canadian Mortgage and Housing Corporation (CMHC) fees.
Q: So finally and perhaps most importantly, can Felix go on his spring break trip?
A: (laughs) Well the wise parent in me thinks he’d be foolish to put that trip on his credit card. But I also remember being that age, and I would probably be thinking, “I’ve gotta go on that trip!”
He needs to put his trip expenses down on paper to understand the true cost so he can decide. Using credit, he’d basically be paying an extra 20% for the cost of the trip.
Final recommendations for Felix:
- Look for a part-time or summer job in his field. Better pay and better experience.
- Reduce the growth of credit card debt immediately by spending less. Gain a better understanding of credit ratings.
- Accept that he may need to live at home or rent after graduation so he can save for his own place.
Lyn’s Bio: Lyn Greer is a Chartered Accountant and independent Certified Financial Planner with Investment Planning Counsel in Richmond Hill, Ontario. She is a past member of IPC’s National Advisory Board and has also volunteered on the Financial Standards Planning Council. Lyn’s specialty is in comprehensive tax planning which is a key focus of her wealth management approach, alongside cash flow analysis, disciplined savings, insurance, and estate planning. You can contact Lyn or learn more at The Greer Team’s official website.
<p>Eric has an extensive background in content marketing and professional writing. He loves to write about personal finance and life insurance issues for the Lifenotes blog because he enjoys the challenge of making complicated topics fun for readers! Eric also covers community outreach initiatives.</p>
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