“I can’t invest because I have no money!”

The number one reason young adults give me for not saving and investing is that they can’t afford to.

I get it. When I finished college at 22, all of my friends were getting married and having kids. I remember being jealous of the married couples because everything they needed to get started was given to them as wedding gifts. Aside from 20 year old hand-me-downs from my mom, I had to buy everything myself. Dishes, furniture, bedding, clothes, rent–all on a single person’s entry-level salary. On top of that, I had a hefty new student loan balance haunting me. In spite of the wedding gifts, the young families had challenges of their own, including the expense of babies and children, mortgages, supporting families on single incomes or two incomes and childcare.

At that time, I met a man who was a successful businessman and investor. He gave me some advice: start saving, even if it’s just a little bit at a time. Save into an RRSP (this was prior to the advent of TFSAs), invest in some mutual funds, and just get started.

I did not heed his advice. And it wasn’t because I thought he was wrong, but because I thought I did not have any money to invest.

For years, I thought about saving and investing, read about saving and investing, and talked about saving and investing. I bought books about saving and investing, went on trips, took courses, furnished my apartment, socialized–all the while telling myself that I had no money to save. (anyone else see the problem here?)

If I had invested just $25/month for the 10 years in which I talked about saving, and if I had earned even a modest return of 3%, I would have had roughly $3,500 in the bank.

You might say that $3,500 is small for 10 years worth of savings, and you would be correct. However, it would have been much better than what I actually had at the end of those 10 years: student loans, credit card debt, and no savings at all.

So when young people tell me they cannot afford to save, my advice is the same that I was given all those years ago: start somewhere. Start anywhere. Start with $25 per month. $50 per month. $100 per month. Whatever you can fit into your monthly budget.

Did you know that you can invest into mutual funds in your TFSA, starting with as little as $25/month? Over time, that money grows. Over time, you can gradually bump up your contributions. Get a raise? Increase your monthly savings. Receive money from parents or grandparents? Dump it in the savings. Get a second job? Increase your monthly savings.

Cash Flow
Of course, all of this is still dependent on your cash flow, which is why this is the first place I start with all of my clients.

Cash flow is your monthly ins and outs. If you bring home $3,000 of income every month and you spend $2,500, your cash flow is $500. If you bring home $3,000 of income every month and you spend $3,500, your cash flow is -$500.

Positive cash flow? You’re good to go!
As long as your cash flow is positive, you can take a portion of it and make that your monthly savings. Often, on paper, people will have a positive cash flow of say $500 or $1,000. When they show me that, my next question is this: Currently, what is happening to that extra money every month? In the vast majority of cases, the response is, “I have no idea”. That means it’s just disappearing on random spending, and we could easily put it to better use. Maybe your monthly cash flow is $500. You might decide to save half of it, $250/month, and keep the other $250 for spending. If you set up an automated monthly contribution to your TFSA, then you don’t even have to think about it; the money just automatically goes into savings and sits there, growing and waiting. Then we can start planning what to do with it.

Negative cash flow? that’s a no-no.
In this scenario, you are going into deficit (read: debt!) every month.

If your cash flow is negative, you have a challenge. That challenge is to make your cash flow positive again. In one sense the solution is actually simple: increase your income, decrease your spending, or both. Simple, yes. Easy? Not necessarily. But there are a number of steps you can take to bring it back into the positive.

Step 1 – Where’s it going? Take a close look at where your money is going every month. Most of us have areas where we spend mindlessly or needlessly. We can usually cut down on some areas, but we can only know that if we take the time to track what we’re actually spending on, and how much. Some banks will break it all down for you in your online banking, showing you how much money you’ve spent in various categories. If your bank doesn’t do that for you, there are other ways to go about it. You can use an app to track everything you spend and sort it into categories. I usually recommend that people track for 3 months so they can get a really good idea. If you’ve never done this, it can be a huge eye-opener. A lot of people use Mint, which ties in all of your accounts and gives you monthly reports and targets.

Step 2 – What can we decrease? I’m not someone who thinks you need to save every penny. You also need to enjoy your life, and a healthy relationship with money includes some indulgences. However, our goal here is to balance our cash flow, so we may need to make some sacrifices along the way. Are there areas where you could reduce your spending, even by $25/month? Are there areas you could cut out altogether? Any memberships you’re not using? Any subscriptions you don’t need? Any luxuries that you truly can’t afford? If your cash flow is consistently negative, you are living above your means and will only dig a big debt hole (trust me, I’ve been there!). Think carefully about what you might change, while still enjoying life. Bonus points if you can find ways to enjoy life that do not cost as much. Buy things used; cook your own food; use the library; share with friends and family; find entertainment that is cheap or free. There are lots of ways to do this without feeling like you’re depriving yourself!

Step 3 – Do we need to increase income? Of course this is easier said than done. You may be due for a raise. You may need a new job. Or a second job. Or a career change. There are other potential streams of income that we don’t always think about: royalties if you create something, rental income if you own something, etc. Sometimes we have to take a temporary hit in income in order to make a change (for example, if you decide to start your own business!). When I was new in my business I worked 7 days a week–5 in my business, and 2 at my weekend job. I knew it wasn’t sustainable long-term, but it was a sacrifice I needed to make for awhile.

Step 4 – Evaluate and make adjustments. Keep tweaking it until your cash flow is positive again. By any amount. If you take yourself from -$500 to +$1, that’s worth celebrating! You’re not going to stop there, but celebrate the progress that you’ve made. And then you can start working toward your savings goals.

Where do I put it?
For most young people, I recommend starting with a TFSA. There are a number of reasons for that which we’ll talk about in another post, but it is usually a great place to start your nest egg. You won’t pay tax on what you earn in the account, and you have a variety of investment options.

The biggest mistake I see people make is to put just straight cash (or worse, GICs!) into their TFSA. With today’s interest rates, straight cash is earning around 1%. Basically, nothing. Ok, just slightly better than nothing (until you take inflation into account–and then you’re losing money). But there is so much more you could do with it. Even a conservative (read: safe) mutual fund might earn 3-4% instead of 1-2%, and you’ve suddenly doubled your return.

Ultimately, how we invest your money depends on a number of factors:
– what is that specific pot of money for? are you saving for emergencies? a home? retirement? a bit of everything?
– how long do you plan for that money to stay invested? we invest 1 year money VERY differently from 30 year money
– what is your personal risk tolerance? how comfortable are you with ups and downs of the investment markets?
– do you have emergency savings?
– are you planning any major life changes in the next several years?
– what kind of return are you hoping to get?
– what are your specific goals–long term and short term?

My job is to work through all of these questions with you and then give you guidance on how you can invest your money and reach your goals. There are plenty of formulae and rules in plenty of books, but most of them generalize too much. You will do better if your plan is tailored specifically to YOU, which is why, statistically, people who work with a good advisor end up with a lot more savings than people who go it alone.

So I’ll never tell you, “put x% in this and x% in that” without knowing your personal situation, goals, and personality. Everyone is different. When random people ask me, “what’s a good investment these days?”, my answer is always, “it depends!”

The Take-home idea

Start somewhere! Anywhere!

If you need to start with getting your cash flow from negative to positive, then start there. If your cash flow is already positive, then pick a number to start with, and automate that into monthly savings. This does not need to be a long-term commitment yet, just a beginning point, and building the habit of saving. Before you know it, you’ll start to see your savings grow and you’ll reap the emotional and fiscal rewards of having made good choices along the way.

Call me
My favourite thing in the world is helping young people take these next steps toward financial freedom. I would love to sit down with you and go over your situation and your cash flow. I would love to teach your more about investing, saving, and planning. I would love to help you automate your money into your first investment account. Call me! We’ll have a coffee and get you started.

Happy 2017!