A 19-year-old student decided to listen to the stars of finance by starting as early as possible to invest his money earned at minimum wage. Now he wants to know how to achieve financial independence at 50.
The situation
At an age when many have a hazy picture of their future, Samuel* has a plan and has already begun to implement it.
“It’s always fascinated me to see someone financially independent at a young age. I say to myself: he understood something that I did not understand. Why couldn’t it be me? “, he says on the phone with great enthusiasm.
Since he started working at the age of 16, he only keeps $150 in his bank account for his expenses. When he receives his pay every two weeks, he replenishes the account up to this maximum of $150. The rest is invested.
“I find it a shame to see students go to work to be able to spend. Me, I work to put some of the money in investments and make money with my savings,” he explains.
In three years, he has already managed to save $20,000.
How does he manage to save so much? He doesn’t have a car, doesn’t vape, gets around by bike or walks when possible and lives with his parents. He also prefers to party with friends with a case of beer bought at the convenience store rather than going to a bar.
“I buy things only when I have accumulated the necessary money and I make smart choices,” explains the young man.
“For example, I just bought a used bike for $90 rather than a new one for $300,” he continues. As I am a gamer, last year i bought a computer tower for $1600. But instead of going back to the store and buying all the new equipment to go with the tower, I got a chair from gamer used and I bought a second-hand screen from a friend of my father. »
Does he suffer from not wearing the popular $400 Air Jordan shoes? “No,” he replies without hesitation. I don’t know if it comes from my upbringing or if it’s in my personality. I’m thrifty, reasonable, and that’s natural. »
Samuel will begin in September a technique in financial and insurance services. He considers himself blessed to still live with his parents and to have no payment on a regular basis. “That’s why I better take advantage of it now and invest as much money as possible, it will definitely be worth it. »
After his studies, he plans to live in Montreal and then return to the suburbs to buy a house. “When I’m going to have a girlfriend, work full time and have children, I want a house, it’s in my plans. »
But his main project is to afford retirement as early as possible in his life from investments and long-term investments, summarizes the young man.
“I would like to invest in the best years of $5000 to $6000 and in the worst years of $2000 to $3000, so an average of $4000 each year. I want to continue to invest money every year for the next 30 years, which will take me to my 50s. »
Can he achieve his goal?
Numbers
Samuel*, 19 years old
Salary: $15.85/hr
Per week in summer: from $396 to $475 (25-30 hours)
Per week during the school year: from $158 to $237 (10-15 hours)
Maximum spend per week: $75
TFSA: $16,500 invested in an equity fund/current value: $18,285
Non-registered investments: $3,500 in a 1-year GIC at 4.5%
analysis
Antoine Chaume-Legault, financial planner and wealth management advisor at Assante Capital Management Ltd. Team Major, is impressed by Samuel’s rigor and ambition.
“By continuing in this direction, he will afford financial independence very early on. Congratulations. »
If, by working for minimum wage, Samuel has already managed to save money, it bodes well for the future when he graduates and gets a well-paid job.
PHOTO EDOUARD PLANTE-FRÉCHETTE, LA PRESSE ARCHIVES
Antoine Chaume-Legault, Financial Planner and Wealth Management Advisor at Assante Capital Management Ltd. Team Major
When aiming for young financial independence, the most important thing is to control your standard of living, not to fall into luxury too quickly or even not to fall into luxury at all.
Antoine Chaume-Legault, Financial Planner and Wealth Management Advisor at Assante Capital Ltée Team Major
To achieve this financial independence, the first years are crucial, he recalls.
“The 8e wonder of the world is compound interest, said Albert Einstein. That’s what this young man will have to keep in mind. »
Having rigor in the first years of work will have a considerable impact on the future. His first 10 years of work will represent more than 50% of his future pension fund, explains the specialist.
How do you plan for the next 75 years? As it is not known whether the student will one day have a position with an employer retirement fund, the planner takes into account only the available data, namely the $4000 per year that Samuel is sure to be able to save.
By investing $4,000 up to 50 years with a rate of return of 7%, Samuel will have a portfolio of nearly $600,000 in 30 years. A nice sum, but which will allow him to finance a living cost of $61,000 per year only until he is 68, which is equivalent to approximately $30,000 net as of today. It should be understood that the first years of sick leave are the most important. If we have to dip into capital then, it’s almost a sure failure to support the cash outflows of the next 45 years.
However, if he worked part-time from age 50 to 60 with an annual salary of $30,000, Samuel would have enough money until age 95, says Antoine Chaume-Legault.
Considering Samuel’s personality type, the $4,000 savings per year can easily be increased to $9,000 by age 40. Will he be able to stop working at 50? According to the planner’s estimates, this solution would bring it up to 80 years.
Here is the recipe for being financially independent until age 95 with an annual cost of living equivalent to $30,000 net today ($61,000 in 2056 dollars): $4,000 savings each year up to 40 years, then $9,000 until age 50, and finally two years of annual income of $30,000.
The goal is reached at age 52.
To make his projections, Antoine Chaume-Legault explains that he uses 7% return until retirement and then reduces to 5%.
“Generally, when we make financial plans, we use rates of return of 4 or 5%. In the case of a young person who has a long investment horizon, we can take a return of 7%. The younger you are, the more risk you should in theory accept in your portfolio.
“I advise him to invest his savings regularly in index funds and forget about them. Time will do its job. »
In addition to his investment portfolio focused on long-term capital growth, Samuel could diversify his assets by investing in a real estate investment trust (REIT), in rental real estate directly, in stocks that generate dividends and in one or more private companies.
Set the obvious
Samuel must also protect his biggest asset, his brain, which will allow him to work for the next 30 years, says the specialist.
As long as he has small incomes, he should maximize the Tax-Free Savings Account (TFSA) first. “His income is too low to take the CELIAPP tax deductions [compte d’épargne libre d’impôt pour l’achat d’une première propriété] and you contribute to your RRSP [régime enregistré d’épargne-retraite] when we think that our current income is higher than our future income. However, he could already contribute to these tax-advantaged schemes, but by postponing the tax deductions until later.
“The purchase of a first property is no longer a guarantee of financial success, far from it,” emphasizes the planner.
“With high interest rates, maintenance costs, the opportunity cost of uninvested down payment, rising taxes and insurance, it’s not true now to say that renting is throw his money out the window, he argues. Being a tenant and disciplined in your savings pays more than owning your condo or your house. »
Samuel will obviously have to revise his plan when he has financial obligations and children, reminds the planner, but this first plan gives him an idea of the possible path to reach his goal.
* Although the case highlighted in this section is real, the first names used are fictitious.
Calling all
Are you planning a project that requires a wise use of your money? Do you have financial problems?