Millennials have it rough.
The baby boomer generation may have faced higher interest rates, but houses were cheaper and the benefit of dual-income (with marriage) started much earlier on average compared to today.
It’s not that millennials don’t want to have families and own houses - they do - but employment is uncertain, and housing/rental rates continue to skyrocket. Student debt is a problem, and graduates often work several jobs to make ends meet, which makes it hard to save for a house or start a family.
There is one thing that, regardless of where you fall on the millennial/post-millennial spectrum, you can do right now to improve your financial future…
Start Saving Your Money!
We interviewed in with Raymond Choo, B.Sc, FMA, FCSI, CIM®, CFP® who is a Senior Investment Advisor with HollisWealth, a divisions of Industrial Alliance Securities Inc. in Vaughan, Ontario to ask his professional opinion on the biggest mistake young people make regarding their finances.
“Combined with excess spending, the biggest mistake young people make when it comes to money is not starting to save early,” he says. “The important thing is to start saving early, make and stick to a budget and a plan for short, medium and long term financial goals. Don’t be preoccupied with brand names, online shopping temptations and other modern conveniences that end up wasting not saving your money”.
It’s never too early (or late) to start saving, but starting early can give you a significant advantage thanks to compound interest.
Why is it important to start saving early?
Two words: Compound Interest.
Regardless of whether you’re on the high end of the millennial spectrum, or you’re a post-millennial, your age is your best asset when it comes to savings. Why? Compound interest!
Compound interest is when the return on the money you’ve invested goes back to the principal amount, which only further increases the return. Consider a snowball rolling down a hill. Your principal amount is the snowball you initially created. Each layer of snow that attaches as it rolls is the interest “picked up” over time, which makes your snowball bigger.
Image: Interest earned on a 1-time lump sum of $1,000 over a 10-year period.
You haven’t actually picked up more snow and added it to the snowball with your own hands and yet, the snowball has grown...as does your initial investment thanks to compound interest.
Even if you can only spare $20 a month to put into a compound interest savings account/investment, then do it. Too many young people put off savings because, for some reason, they feel they can’t until they have hundreds or thousands to spare.
If you have a lot of excess cash after you pay the bills, then there’s no excuse to not start investing in your future, be it retirement, a down payment on a car, or even a house.
Money Management 101
We asked Raymond what the top six areas of finance are that young people should start learning about ASAP.
“Budgeting, saving, investing, credit, identity theft & safety and wills/insurance are all very dense, but necessary parts of finance everyone should know,” he says. “Education, education, education! Millennials don’t have the same goals as their parents or the same obstacles, so the sooner they learn the basics, the better”.
1. Budgeting Basics
- Are you running a surplus or a deficit? Figure out how much income is coming in every month and how much you’re spending.
- Make a budget and stick to it!
- Find areas to back on unnecessary expenses
2. Saving & Investing Basics
- Understand the concept of paying yourself first. Put something into a high-interest savings account every paycheck. It doesn’t matter how small. Use your youth to your advantage.
- Review your financial goals every year, at minimum
- Every savings goal requires sacrifice. Determine what yours might have to be. Perhaps it’s delaying any trips until your credit card debt is paid off, or maybe it’s picking up a second job. Maybe it’s a spending freeze.
- The benefit of being a millennial with all this tech is all of the money-saving apps! Use them!
- Talk to a professional (like Raymond) to plot out a financial plan both short and long term and learn about investing.
- TFSA vs RRSP: If you earn $50,000 or more annually, RRSP is recommended. Anything less than that, a TFSA is a better choice. A TFSA is an excellent savings tool for any goals.
3. Credit & Debt Basics
- If you’re not using credit responsibly now, it’s time to reign it in. Use cash for everything if possible. If you don’t have the money in hand (eg: the envelope system) then don’t spend it!
- Learning how to use credit wisely; only use it for purchases you can pay off at the end of the cycle. If you do carry a balance, a short term goal should be to pay it off ASAP.
- Learn about credit scores; how to build one, how to improve one and where to get them for free (like Borrowell.ca)
4. Identity & Safety Basics
- It’s a different financial world than 50 years ago. Everything is online. Learn how to protect your information on and offline.
- What to do when you’ve been a victim of identity theft
5. Life insurance & Wills Basics
- Everyone should have life insurance if they have debt. The benefit of youth is cheap life insurance, especially term insurance. In the event of a horrible event, you wouldn’t want your next of kin to be saddled with any debt left behind.
- If you have children, life insurance is an absolute must. In the event of your untimely death, your offspring will need serious financial help. If you already have life insurance, it’s time to increase it.
- If you have children or not, having disability or critical illness insurance is also a good idea, especially if you run your own business.
Investment and Savings Scenarios for Millennials
We asked Raymond about three common investment and financials scenarios for young people and what general things to accomplish depending on where they are in life.
1. You’re starting a job right out of high school
It’s time to become a financial expert since you’ll be earning more money than your peers out-of-the-gate. Learning about key categories like budgeting, credit & debt, investing, savings (short, medium and long term) and how to protect yourself from identity theft are the main places to start.
Once the educational foundation is set, it’s time to see a financial planning professional and set out a solid financial plan.
2. You’re in university/college/trade school
Your financial focus while in post-secondary is just paying for school. If you’re able to save a little bit of money, ideally in a TFSA, then do so. Let compound interest work for you. If you’re unable to save anything and are living off of student loans, be very frugal with your money. Don’t use your line of credit for spring break! You’ll regret it later.
3. You’re a university graduate in the workforce with loans to pay off
Figure out your current cash flow situation and put money into three categories:
- needs (housing, food, transportation, health care, etc.)
- debt management
At this point, discretionary income should be minimal because you need to pay off debt first. Dinners out, trips and pointless spending can come later if you’re financially stable. The longer you put off paying off debt, the more money you’re actually stealing from yourself by paying interest to your lenders.
Your savings goals should be smaller in the beginning compared to your debt management amount, but it’s supposed to be. Once your debt is completely paid off, you can allocate that amount to your savings goals!
Best Books on Investments and Financial Literacy?
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