Financial tips for your 20s and 30s

CIBC: How critical is it for someone in their 20s to take their finances seriously? How much of an impact do you think this can have on their future?

Carissa Lucreziano: It’s so crucial because it’s such an opportune time. Take investing, for example. Younger people have time on their side, so every little bit saved each day can add up to a sizable amount in the future because of the benefits of compounding. Compounding is when your initial amount saved earns interest, thereby increasing the pool of savings, which then earns interest on top of the new larger pool, and so on. Essentially, you’re earning interest on your interest and growing your money faster.

Managing your finances early on can also help you develop and maintain good habits. Here are some examples of good financial habits.

Setting aside an emergency fund

This can come in handy when unexpected events happen, like, for example, if a pet gets sick, the car needs repairs, income is temporarily disrupted or a family member needs urgent support.

Paying yourself first

Regularly saving a portion of income before you’re tempted to spend it on anything else can go a long way towards helping fund a specific goal. Start small, like saving 10% of each paycheque, and adjust that amount as your situation changes. Make it regular by setting up an automatic transfer between accounts, coordinated with pay schedules.  

Keeping debt under control

The key is to not let debt get out of hand. Avoid maxing credit cards, and pay the full balance each month, rather than just the minimum. This'll help build a good personal credit score, which can be beneficial in the future, like when applying for a loan or a mortgage. 

Set the stage with good habits now to last you a lifetime. If you need some direction on how to get started, you can contact one of our advisors, who would be more than happy to help.

CIBC: By the time most people have reached their 30s, they've often taken on serious financial commitments, including childcare and mortgage payments. Why is it important to still save while juggling expenses, and what are some strategies to do so?

C.L.: According to a recent CIBC poll, 58% of Canadians under age 30 have a goal to save as much money as they can in 2021, and 59% wish they were better at saving.¹ So it’s important to know you’re not alone — lots of people your age struggle with competing financial priorities. Ultimately, it’s important to still save while juggling expenses because savings are the fuel for your goals. As much as you want to take care of everything, you need to simultaneously make your own personal goals a priority.

As mentioned before, you can pay yourself first by setting up automatic transfers into savings accounts that fund your goals. Saving even small amounts regularly can add up over time because of the compound interest. Creating a financial plan is key because it can help keep you on track to your financial goals, while at the same time managing the rest of your competing priorities. I recommend meeting with an advisor who can help you build a comprehensive plan tailored to your unique needs.

Budgeting is also helpful. If you’re diligent about sticking to your allotted saving and spending amounts, it can help you stay on track.

CIBC: For people in their 20s and 30s with the goal of buying a home one day, how much should someone generally save for a down payment?

C.L.: It entirely depends upon the value of the home you’re hoping to purchase and what you can reasonably afford. The Canada Mortgage and Housing Corporation (CMHC) recommends “your monthly housing costs should not be more than about 35% of your gross monthly income.”²

In terms of the down payment amount, you’ll need at least 5% if the home is $500,000 or less. If you’re looking at a home between $500,000, and $999,999, then you’ll need at least 5% of the first $500,000 of the purchase price and at least 10% for the portion of the purchase price above $500,000. If your down payment is less than 20%, you’ll also need to pay for mortgage loan insurance.

I highly recommend using a mortgage calculator. It'll help determine how much you can afford for the ongoing mortgage payments, based on the down payment you plan to make. It’s good to save as much as possible, as this'll decrease your mortgage loan insurance as well as total interest costs over the long term. Also consider that owning a home comes with additional expenses, like property taxes and maintenance fees, when things break down. Your ongoing mortgage payments should still leave you with enough income afterwards to cover these additional expenses. 

CIBC: Is there a recommended amount of savings someone in their 30s should set aside for emergencies?

C.L.: In general, it’s a good idea to have access to enough cash to cover living expenses for at least 3 months in case of a period of time where cash inflows are compromised. COVID-19 has shown us that life can be unpredictable and is a great example of the importance of having an emergency fund. Your emergency fund should ideally hold you over until the cash inflows resume.  

For example, if someone loses their job that covers basic living expenses of $2,000 per month, and they estimate it'll take 3 months to find a new job, then they'll need $6,000 cash in savings or a line of credit, as their emergency fund.

CIBC: How much should someone hope to have saved for retirement, especially as people are living longer?

C.L.: Retirement looks different for everyone, so the amount of savings individuals will need for their retirement lifestyle depends on their anticipated expenses and income, now and in retirement, as well as the after-tax return on investments. Taking stock of your investments, expenses and income can help you estimate how much you may need to save. It’s optimal to start saving as early as possible. Implementing a regular savings plan will allow you to take advantage of the longer time horizon to grow those savings. To get a better picture of what you’ll need to retire, you can try out our retirement savings calculator.

You should also keep in mind your retirement plan and the goals associated with it will change leading up to and in retirement. You may decide you want to spend your time in different ways than originally planned, or unexpected events may cause you to shift your financial priorities. That’s why we recommend creating a “living plan," which means it evolves along with you and your changing needs.

CIBC: How can a registered retirement savings plan (RRSP) help a person in their 20s or 30s achieve their financial goals? How about a tax-free savings account (TFSA)?

C.L.: Whether you choose to invest in an RRSP, a TFSA, or both, you'll still be ahead of the game because you're saving for your future. These savings vehicles ultimately provide the opportunity to earn a tax-free rate of return on investments that are held within these plans.

RRSPs can be used as part of your savings to buy your first home by taking advantage of the First Time Home Buyers’ Plan. You can withdraw up to $35,000 from your RRSP and will have a 15-year period to repay the amount withdrawn. RRSPs are also useful for their primary purpose, which is to save for retirement. Younger people can take advantage of the longer time horizon to save small, consistent amounts that may add up to a significant amount by the time you’re ready to live that retirement of your dreams. 

TFSAs are a terrific savings option because they grow savings completely tax-free, assuming you follow the rules. You can also re-contribute funds that were withdrawn in the following year. 

To learn more about RRSPs and TFSAs, read Just do it: The case for tax-free investing (PDF, 205 KB) Opens in a new window..

CIBC: What might a healthy investment portfolio look like for someone in their 30s?

C.L.: At this age, you may be balancing between near-term needs, like expenses, a down payment for a house and paying off debt, and long-term needs, like retirement income. While this balance can be a challenge, it’s important to maximize the benefits of long-term compounding by saving and investing regularly in a diversified portfolio. A diversified portfolio is one that has a mix of assets and exposes you to minimal risk while still earning a return. Studies have shown more than 90% of the variability in long-term portfolio returns is determined by asset allocation. Many investors believe stock-picking and timing the market are the most important determinants of the variation of long-term portfolio performance, but these actually account for less than 10%.³

Of course, it also depends on their personal risk tolerance and objectives, but younger investors are generally able to build more aggressive portfolios with greater allocation to equities. Ultimately, portfolio construction depends on many individual factors, so it’s a good idea to speak with an advisor to determine the right strategy for you. You can also discover what kind of investor you are by visiting Your Investor Profile. 

CIBC: Are your 30s too early to begin estate planning? Why or why not?

C.L.: When you think of an “estate,” you may picture a mansion with acres of gardens, dozens of rooms and a pool house. The reality is that almost every adult has an estate, even if it’s not elaborate. If you own investments, real estate, vehicles or other personal effects, then you have an estate. To allow for your estate to be passed to your loved ones in the manner you choose, you need an estate plan. An estate plan is always recommended if you have any assets at all and is essential if you plan to take care of any dependents, such as kids, elderly parents or others.

Estate planning is simply making arrangements for the management and transfer of your estate. By planning, you do the best to arrange for your estate to pass on according to your wishes, in a way that may minimize delays and costs. Although this kind of planning may seem premature, it’s actually a safeguard for the people you love and the things you care about.

To learn more, check out Planning an estate.

CIBC: What advice do you have for dealing with financial stress?

C.L.: My #1 tip here is to have a financial plan. By mapping your goals, priorities, income and expenses along a timeline, you can better understand how competing priorities are being managed. You may also uncover cash shortfalls or surpluses and can then take action based on the goals you want to achieve. An advisor can also help you do this, using tools that map your cash flow and allocate funds to each of your goals.

Having a plan can also help you manage stress through uncertain times. The CIBC poll also found that 74% of Canadians under age 30 felt that the uncertainty of the pandemic made it difficult to plan. Additionally, 57% of them desired expert advice on how to achieve their financial priorities in 2021.¹ This demonstrates the value of having a plan through turbulent times to help stay on track to achieving your goals.

It’s also important to remember that you’re young and have lots of time to work out any roadblocks that come up. Your 30s can be a phase of growth in terms of your career and achieving some of your larger financial goals.

Also, you should remember to take time for your favourite stress-relief techniques like reading, exercising, baking or playing with your kids. You’re doing your best and you need to give yourself credit for that.

CIBC: What advice do you have for people who may find themselves wondering whether they've done well enough financially?

C.L.: The old adage “money doesn’t bring you happiness” is true. Even the most financially successful people may be experiencing more debt than they can handle or admit. 

If you're on your way to saving for your first home, or just purchased a first home; are managing a budget or supporting a family; and enjoying a fun night out every once in a while, there’s a lot to be proud of. You should focus on your long-term financial plan to ensure you can take advantage of future opportunities and maximize your goals. Comparing yourself to others based on income alone is never helpful.

¹ Source: CIBC Financial Confidence and Priorities Poll. From November 26 to November 29, 2020, an online survey was done of 3,028 randomly selected Canadian adults who are panelists of Maru Voice Canada Opens in a new window.. This survey was executed by Maru/Blue Opens in a new window.. For comparison purposes, a probability sample of this size has an estimated margin of error, which measures sampling variability, of +/- 2.5%, 19 times out of 20. The results have been weighted by education, age, gender and region, and, in Quebec, language to match the population, according to census data. This is to ensure the sample is representative of the entire adult population of Canada. Discrepancies in or between totals are due to rounding.

² Source: Buying a home, Financial Consumer Agency of Canada Opens in a new window..

³ Source: Brinson, Singer, Beebower Study, Financial Analysts Journal, Feb. 28. 1991.