How to build your own gratuity in 3 steps
If you’re early in your career you might be thinking, “what is a gratuity?”
It was a sum of money paid out to eligible education members (who had banked their sick days over the course of their career) upon their retirement.
While a gratuity may represent a benefit of schooldays gone by, it doesn’t mean you can’t take the steps today to start building your own.
Here’s how to build your own retirement gratuity in three easy steps:
Step 1: Free up your monthly cash flow by consolidating high-interest debt.
If you’re in the first few years of your career and on the lower end of the pay grid, chances are you’re simply trying to make ends meet. One of the biggest financial pinches you might be feeling is all that money you’re dishing out on high-interest debt payments. From department store and bank credit cards, to car and student loans, the interest charges on those combined monthly payments can really add up.
However, securing a low-interest line of credit to consolidate and pay off multiple high-interest debts is one of the easiest and most immediate ways to free up monthly cash flow. Plus consolidating will save you hundreds or even thousands of dollars in interest payments over time—and that’s money you can put towards building your own gratuity.
Step 2: Set up a monthly savings plan/start up an investment portfolio.
Once you’ve minimized your debt load and maximized your cash flow, put those funds to work for you by investing them. A great investment vehicle to consider is the Tax-Free Savings Account (TFSA), as you’ll be building a gratuity from which you’ll be able to access the funds, tax-free.
Step 3: Regularly ‘feed’ your investment and watch it grow.
If you’re early in your career, you don’t need a lot of money to start building your gratuity (because you have the luxury of time on your side for compound interest to work its magic). Plus if you have that money automatically deducted from your account and transferred into your investment through pre-authorized contributions, you won’t even miss it (especially if that money used to be going towards those high-interest debt payments you eliminated in Step 1).
Of course the longer you wait to start building your investment, the less time you’ll have to take advantage of compound interest. Which means having to increase the dollar amount of your monthly contributions in order to reach your ultimate financial goal.
Since this lesson is all about building your own gratuity, let’s see how much money you would need to contribute over a set period of time if your gratuity-building goal amount is $30,000:
|
NUMBER OF YEARS FROM RETIREMENT
|
ANNUAL INTEREST RATE COMPOUNDED MONTHLY* |
MONTHLY CONTRIBUTION REQUIRED TO REACH GOAL |
| 30 | 5% | $36 |
| 25 | 5% | $51 |
| 20 | 5% | $73 |
| 15 | 5% | $112 |
| 10 | 5% | $195 |
| 5 | 5% | $440 |
*Assumes annual interest rate remains constant over investment duration.
To maximize your contributions even further, Educators Financial Planner professional Jim Wanamaker suggests increasing your contributions every year. “If education members start with a small amount and bump it up every year, chances are they won’t even notice the difference in their budget, yet eventually they will be saving a significant amount of money (thanks to compound interest).”
The moral of the story: every dollar counts when saving towards your financial goals—or in this case, building your gratuity.
Before you start building your own gratuity (or any financial goal for that matter), be sure to get expert financial advice.
That’s where Educators Financial Group comes in.
Because we’re familiar with pay grids, pension plans, and how an education member’s finances can be impacted by changes over time, we’re in the best position to help you to build your own gratuity—or build whatever other financial goals you have in mind.
