When you’re a student, making smart money decisions may not be your biggest priority, especially with all the responsibilities and deadlines you have
to juggle. However, being a student has financial implications.
Attending university has the direct cost of paying tuition. It also has an opportunity cost — instead of using your time to work and generate money, you are instead using your time to attend school and study. A major monetary incentive of attending and success- fully graduating university is that it can give you the skills and qualifications to work in a higher paying job.
If you agree that one of the reasons you’re attending university is monetary, then it is also important to consider the implications of the financial decisions you make as a student.
Financial decisions you make when you are young will impact you when you enter into the workforce. Money decisions compound because interest compounds. The earlier in your life you make a financial decision, the larger the impact it can have. This can be good but it also can be bad.
But, this is important because your financial situation will influence a lot of your decisions: the first job you take, the compromises you will make, and the level of flexibility you have.
One of the best ways to protect yourself financially is to learn about investing and to understand the tools available to you. This knowledge can be used now while you’re a student or it may inform your decisions when you enter into the workforce after you graduate.
Alyssa Davies, author of The 100 Day Financial Goal Journal and founder of Mixed Up Money, agrees that investing as early as possible is a good idea.
“Typically, we’re told not to worry about investing at a young age because we’ll earn more later in life, but the mindset is actually backwards,” Davies says. “Even if it’s a small amount, it can make a dramatic difference in the long term.”
TAX-FREE SAVINGS VS REGISTERED RETIREMENT SAVINGS PLAN
The two most powerful money tools provided to every Canadian are the Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plan (RRSP). These are tax advantaged accounts. Let’s take a closer look into it.
When you turn 18, you are officially entitled to open a TFSA. This is a tax-sheltered account, so any amount of money you gain (dividends, capital gains, interest), is fully your money. You won’t ever pay tax on that.
Every year, the government will set a contribution limit. According to RBC, in 2021 the contribution limit was $6,000. Any unused amount will be carried forward to the next year. For example, let’s say you only contribute $2,000 dollars in 2021. The next year, you will have the remaining $4,000 plus the 2022 annual contribution limit. Let’s say you became eligible for a TFSA in 2020 but have not contributed yet. You would have the lifetime contribution limit of $12,000 which is the annual contribution limit of 2020 and 2021 added together.
Even though the word savings is in the name, the best way to utilize the account is by investing inside of it. After all, all your gains are tax free.
When you start earning an income, you are officially entitled to open an RRSP. This is a tax deferred account and it’s also tax deductible. The contribution limit is based on your income and is capped at a specified limit by the government (in 2021 it was 18 per cent of your income, up to the maximum contribu-
tion limit of $23,780). Unused contributions will be carried to the next year, just as they are with a TFSA.
The money you contribute will lower the amount of tax you pay (likely resulting in a tax return the following year, which you can strategically contribute to receive another tax return in the following year). The money you contribute and the gains are tax deferred. This is why you will get a tax refund when you
contribute. Until you withdraw the money, you won’t pay tax on the gains or the initial investment. This allows for the gains to be fully re-invested to allow for continued growth. The idea is that you will withdraw it in your retirement when your income is lower and pay minimal taxes on it during that time. Unless you’re earning a significant income as a student, this tool becomes important when you join the workforce.
According to Davies, the best option for younger Canadians is the TFSA. The RRSP offers advantages come tax season, but students already have a great tax benefit just for pursuing post-secondary education, she explains.
“If you can max your TFSA out every year, that is a phenomenal win and you would be set for retirement much earlier than most,” she says.
STUDENT LOANS OR STOCK MARKET
A lot of students and new graduates focus on aggressively paying off their student debt before looking to invest. Every financial decision has an opportunity cost. If you focus solely on paying off student debt, then you forego potential gains in the stock market.
Government student loans are historically low interest. The RBC on Campus team: manager Kristen Delay and digital banking advisor Ryan McGrath break them down as follows.
Federal Student Loan: You have two interest rate options to choose from for your Canada Student Loan
- A floating interest rate equal to prime
(At the time of publication, this is 2.45
- A fixed interest rate of the current
prime rate + 2 per cent
According to the National Student Loans Service Centre, the federal government has frozen student loan interest at 0 per cent until March 2023.
Provincial Student Loan: You have two interest rate options to choose from for your Alberta Student Loan
- Floating rate – prime rate plus
1 per cent
- Fixed rate – prime rate plus 2 per cent
Student loans by default have a floating rate, however you can change it to a fixed rate during repayment. Once you make the change, it cannot be undone.
A line of credit or credit cards typically carry a much higher interest rate. For example, the RBC student credit card has a rate of 19.99 per cent interest. Lines of credit don’t usually defer interest, you will need to make interest payments monthly on the money you borrow. It’s also important to acknowledge that student loans can’t be discharged even with bankruptcy; you have to pay them off.
Davies says, no matter where you decide to receive financial support for your education, you need to pay attention to the fine print.
On the other hand, when it comes to investing and market growth, according to the Washington Post the S&P 500 Index, which is a market capitalization index of the 500 largest U.S. publicly traded companies, grew by more than 16 per cent in 2020. This is a good insight into how the stock market has
been growing overall.
If all your money went into paying off your student loans, you would’ve lost out on that gain. However, the money you invest is to grow your wealth and can’t be used as a targeted tool to pay off your debt when you graduate. You can’t control market fluctuations and you can’t time the market. Your motivation to
invest early is that you will spend more time in the market.
Every year your money is invested, it is growing and compounding. Compounding is when your interest starts to generate interest and its power magnifies the longer the money is there.
A balanced approach should be used when deciding whether you should pay off your student loans or invest in the stock market. If your loan is a high interest loan, then your focus should be to pay off the loan. If your loan is a low-interest loan, you can consider paying off the loan while still allotting some
money to invest and grow your wealth. However, every situation is unique and the answer is not one size fits all.
WHERE TO START?
So, you’ve decided that you want to start investing but you’re not quite sure where to start. What sort of investing accounts are available to you? Let’s put the pieces together.
First things first: Whichever way you choose to start investing, as a student, you should be opening up a TFSA and investing inside of it.
“Robo Advisors are AI based investment assistants that are used when investing in lower cost ETF (Exchange Traded Funds) portfolios,” explain Delay and McGrath in an email. The client fills out a questionnaire and the robo advisor will recommend an investment portfolio.
According to Davies, robo-advisors are a great investment option because you don’t need to know everything to get started, and you also don’t need a lot of money.
As a busy student, this is often the best place to start because all you need to do is contribute money. A robo-advisor is also a great place to begin learning about the stock market as you can easily track your investments.
Some of the most popular robo-advisors to check out are Wealthsimple Invest, RBC InvestEase, and Questwealth.
Before you jump into DIY investing, it’s essential that you’ve done your research and set clear goals. Historically, the stock market provides the highest returns and rebounds from dips. In 2008 we had a crash, but today in 2021, Forbes is reporting historic highs. Risk tolerance is key because you can’t control stock market fluctuations but a loss is not a loss unless you sell your holdings (such as stocks or ETFs) at a lower price.
Some excellent brokerage options for students are Wealthsimple Trade, Questrade, and National Bank Direct Brokerage.
The financial decisions you make as a student are important! Our hard work in university is done with the hopes of having a higher paying job in the future. Money decisions compound and one of the best ways we can protect ourselves financially is by investing.
Are you looking for more financial tips or resources? Stop by the RBC On Campus location anytime for personalized advice. They offer a variety of free advice events, created specifically for students, including Budgeting 101, Getting and Keeping Good Student Credit, and Principles of Investing.
RBC has also partnered with McGill University to offer a free personal finance course consisting of eight modules covering a gamut of important topics available to students.
For more info, check out their Student Page and a list of free articles about life and money at rbcroyalbank.com.