Own Your Financial Future

A common question that recent graduates ask is: what is the salary trajectory of an engineer? The Compensation Survey provides a good indicator, but it tells only half of the story. We are currently in an economic downturn. Once graduated, you may not move as quickly through an upwardly mobile career as generations before you did. This probably means you have a much smaller tolerance for error in money management. 

Financial literacy is the ability to make responsible financial decisions at every life stage. Without basic financial literacy, no one can accumulate personal wealth, regardless of income level. Regardless of economic climate and your income level, the following tips may help you build wealth during your time in school and in the workforce. As you apply for co-op jobs and full-time work, keep the following concepts in mind:

Compound Interest

These days, it is not uncommon for university students to carry a student loan. Based on a 2012 survey from Simon Fraser University, roughly half of the university students owed an average of $25,000 by the time they graduated. For the most part, student loans are sound financial strategy as long as you don’t have to pay interest. Unfortunately, many Canadian students do not realize how difficult paying off an average student loan can be and are unaware of how compound interest affects an unpaid balance.  Say, for example, the interest rate on your $25,000 government student loan is 7.7% (prime plus 5%). According to the loan agreement, you don't have to start repayment until six months after you graduate; however, interest starts accruing upon graduation. You have up to 9.5 years (114 months) to pay off your loan full, and your minimum monthly repayment is $310—this amount So you decide to do just that. However, with compound interest, interest is calculated not only on the initial principal but on the accumulated interest of previous periods of the loan as well. Eventually, you will have paid a staggering $10,340 interest on top of your original $25,000 loan. You could easily find yourself burning your hard-earned cash in interest and getting absolutely nothing in return.

Tips: Pay off your loans as quickly as you can. Any time you have extra money—even while you are still attending school—make lump sum payments to pay down the principal of your loan. Once employed, you can revise your repayment schedule and increase the amount you pay above your minimum monthly payment. This reduces the total amount of interest you will pay.

Gross Income vs. Net Pay

While many professionals earn a respectable income, you cannot accumulate wealth until you pay off your debts. Gross income is money you earn through contribution of your time and talent. Net pay is the pay cheque amount you take home after all the deductions taken off your gross income. By law, your employer must deduct personal income tax and contributions to employment insurance (EI) and Canada Pension Plan (CPP) directly from your gross income and remit these amounts to the Canada Revenue Agency on your behalf. If you have opted to participate in a pension plan, a group insurance plan, or an RRSP savings plan, your employer may also deduct additional amounts from your gross income. Wealth is the money you retain after income taxes, personal expenses, and debt repayments.

Tips: Once you clear your debt (or avoid it in the first place), start maximizing your saving potential: build your personal budget (how much you can afford to spend) based on net pay, not gross income. The 2016 CPP and EI payroll deductions for full-time employee are 4.95% and 1.88%, respectively, up to maximum limits ($2,544 CPP and $955 EI). The payroll tax deduction amount will be calculated by your employer based on the information you fill out in TD1 forms. For an annual taxable income range from $55K to $95K, the combined federal/BC taxes (2016) deducted will range from 16% to 22% of your gross income.

It takes planning, prioritization, and good judgment to manage one’s financial future. No one says it will be easy, but are these not the leadership skills you strive to develop as young professionals? Karen Chan, P.Eng., CPA, CMA

After graduating from UBC with an M.A.Sc. in civil/environmental engineering, Karen Chan worked as engineering consultant for 15 years. Currently, she is a R&D consultant and manager at KPMG, a leading professional services firm. In her current role, Karen works with entrepreneurs and management executives in STEM (science, technology, engineering, mathematics) companies to identify funding sources and apply for SR&ED tax credit claims. As Chartered Professional Accountant (CPA, CMA), Karen supports the Canada Financial Literacy volunteer program by presenting free sessions to post-secondary students.

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