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.
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 gets his pay every two weeks, he tops up the account up to that $150 maximum. The rest is invested.
“I find it a shame to see students go to work so they can spend money. 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 does not have a car, does not vape, travels 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. Since I’m a gamer, last year I got myself a $1600 computer tower. But instead of going back to the store and buying all the new gear to go with the tower, I picked up a used gaming chair and bought a second-hand monitor from a friend of my dad’s. »
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 am thrifty, reasonable, and that is natural. »
Samuel will start in September a technique in financial and insurance services. He considers himself lucky to still live with his parents and to have no regular payments. “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 kids, I want a house, that’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 investing money every year for the next 30 years, which will take me into my 50s. »
Can he achieve his goal?
Samuel*, 19 years old
Salary: $15.85/hrPer week summer: $396-$475 (25-30 hours)Per week school year: $158-$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%
Antoine Chaume-Legault, Financial Planner and Wealth Advisor at Assante Capital Management Ltd. Team Major, is impressed with Samuel’s rigor and ambition.
“By continuing in this direction, he will afford financial independence very early. Congratulations. »
If, by working for minimum wage, Samuel has already managed to save some money, it bodes well for the future when he graduates and gets a well-paid job.
To achieve this financial independence, the first years are crucial, he recalls.
“The 8th wonder of the world is compound interest,” said Albert Einstein. This is what this young man will have to keep in mind. »
Having rigor in your first years of work will have a huge 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? Since it is not known if the student will ever have a position with an employer retirement fund, the planner only takes into account the available data, namely the $4,000 per year that Samuel is sure he can save.
By investing $4,000 for up to 50 years with a 7% rate of return, Samuel will have a portfolio of almost $600,000 in 30 years. A nice sum, but which will allow him to finance a living cost of only $61,000 per year 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 is 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. Can he stop working at 50? According to the planner’s estimates, this solution would bring it up to 80 years.
Here, then, is the suggested 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 saved 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 achieved 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 put his savings in index funds regularly 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.
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 tax deductions from the TFSA [tax-free savings account for the purchase of a first property] and you contribute to your RRSP [registered retirement savings plan] when you think that our current income is higher than our future income. However, he could already contribute to these tax-advantaged plans, 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, opportunity cost of uninvested down payment, increasing taxes and insurance, it’s wrong now to say that being a tenant 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.
Planning a project that requires wise use of your money? Do you have financial problems?