Early investing pays dividends later

The plethora of reports indicating that Canadian boomers are not financially prepared properly for retirement adds fuel to the argument that people should start saving a lot earlier in their lives.

The plethora of reports indicating that Canadian boomers are not financially prepared properly for retirement adds fuel to the argument that people should start saving a lot earlier in their lives.

A new poll by Investors Group suggests that Canadians between 18 and 34 are among the least likely age group in the country to put money away into their registered retirement savings plans or tax free savings accounts during RRSP season.

The poll showed that only 29 per cent of Canadians in that age bracket contributed to their RRSP in the 2009 tax year compared to the national average of 36 per cent. As of March 2010, only 23 per cent of 18- to 34-year-olds had opened a TFSA, compared to 32 per cent of Canadians as a whole.

The great advantage of starting to save early in life is generally demonstrated by the concept of compound growth. For example, if you invested $2,000 at the beginning of each year, starting at 21, and got a pre-tax return of eight per cent, you would have $398,805 by the time you turned 65.

However, if you waited and started saving at age 30 and got the same returns, you would have to invest nearly four times as much to have the same amount at 65.

“While retirement may be the last thing on the mind of a twenty-something, the effects of compound growth are a compelling reason to consider investing early and often while you’re young,” said Gaetan Ruest, director of strategic investment planning at Investors Group. “Giving your savings a head start while you’re young can give you greater flexibility to invest in higher risk vehicles and the potential to generate greater returns in the long term.”

Early saving may be great in theory, but in reality many Canadians, young and old alike, are not that well-educated about financial theories and practices and often lack the information they need to make sound financial decisions.

In a study, the Investor Education Fund (IEF) found that a significant portion of high school students aged 14 to 18 don’t have the appropriate knowledge to make informed financial choices. Less than half of students surveyed know how to create a budget, less than a third believe they make good spending decisions, and only 38 per cent feel they are prepared to manage their money after graduation.

The survey found that 90 per cent of students still go to their parents for financial information. While the students believe it’s important for schools to provide them with information on managing money and personal finances, only 18 per cent say their school is doing well in this area.

As well, many young Canadians are entering their adult and working lives with a mountain of debt that they have accumulated to pay for their education.

The Canadian Federation of Students estimates the average debt load for undergraduate university students in 2006 was $24,047. Students are finishing university with overwhelming debts, which have to be paid off first, thereby delaying when they can start saving.

Despite our prosperity, the general level of financial literacy of Canadians is only average when compared to other countries like Britain and Italy, say reports from the Organization for Economic Co-operation and Development and the Canadian Council of Learning.

The level of financial education and literacy in Canada is a concern to the federal government, which has established a task force to study the issue and develop an action plan to improve financial literacy in the country.

One of the messages about investing and preparing for retirement has to be that it’s never too early or too late to start saving.

“Starting to invest early is like the tortoise and the hare: slow and steady wins the race,” said Ruest.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.

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