Me and My Money

Frugal grad stumped about next step...

Posted November 25, 2011
Originally Published March 18, 2010

Q: I managed to finish my bachelor and master’s degrees without any debt through a combination of summer jobs and frugality. In fact, I have $40,000 in savings.
I'm planning on continuing in graduate school for the next five years, for which my university pays tuition and grants a small stipend, so I won't likely need to use much of what I've already saved in the near future (assuming things like marriage don't happen any time soon.)

My problem is that I really have no idea what the best thing is to do with my money. I currently have about half in a high-interest savings account and half in GICs. I'd like to contribute the maximum amount to a tax-free savings account (TFSA) each year to save for the long term, but when I visited the bank this year to set up a new GIC, they suggested instead that I should consider their mutual funds. Yet the fees seem rather high, and I’m somewhat skeptical of the stock market. What would you recommend? Matthew


A: Two degrees, no student debt and even savings? Wow. I’m sure there’s an award somewhere for that kind of accomplishment.

Funny thing about money. You have been careful with your spending and cautious about how you savedinvested it, but those admirable traits are now causing you grief because someone else is telling you there is another and better path.

My number one rule is to trust your gut; if you're uneasy about something don't go there. Many people who have wailed to me over the years about one investment mistake or another recognized, after the fact, they were doubtful, nervous or feeling pressured. But they ignored the warning signs, and later regretted it.

There’s absolutely nothing wrong with what you are currently doing with your money. The return is low but there’s no risk of loss; which I suspect you couldn’t stomach. Few of us are truly prepared for stock market downturns. I've even had professional investors break into tears discussing their losses.

You’re not currently paying any income tax, but certainly some of your funds could be contributed to an RRSP to reduce future tax bills. Later you can withdraw from it for more schooling or should you wish to buy a house.

However, if you expect that a university, government or industry job is in your future with good pension benefits, you might consider staying the course and depositing the maximum annually in your TFSA while keeping the remainder of your savings outside a registered account.

This gives you flexibility and upon retirement (I know, eons away) you won’t be constrained in terms of required withdrawals. But if interest rates rise -- and there’s nowhere else for them to go -- your investments in GICs and high interest savings accounts (not including the TFSA money), will be taxed as income.

Here’s an option that might help you sleep at night. GICs for your TFSA andor RRSP, emergency cash in your high interest savings and a small exposure to the stock market through low fee Exchange Traded Funds (ETFs). ETFs mirror a given respective stock market. In Canada, iShares are the oldest but ETFs are now also available through BMO and Claymar.

You can buy and sell ETFs like any other stock. There is a good primer on ETFs on the Investor Education Fund website. Go to www.getsmarteraboutmoney.com, search Exchange Traded Funds.

Another alternative is to invest your savings in real estate which, over time, returns roughly the same as the stock market. But you need to calculate your expenses carefully so as not to stretch yourself while at graduate school. Just don't forget that real estate, like the stock market, fluctuates and the downs can be prolonged.

As a general rule, wherever you put your money should be consistent with your personality.

Above all, relax. You have made good decisions so far.

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