According to MONEY® Magazine (April 15, 2013) these are four basic issues that need to be recognized when trying to financially educate Millennials (Gen Y).
- Biggest cash drain: Student loans and other debt
- Biggest challenge: Overcoming fear of investing
- Biggest opportunity: Lots of time for your money to compound
- Savings goal at age 30: 0.6 x your income
The 25-30 year old age group today face many financial challenges. The expense of a college education has almost doubled in the past decade leaving these young adults with an average of $25,000 in student loan debt upon graduation.
This, combined with credit card debt can pose daunting challenges to the new investor/saver. They are just starting out and need to recognize that now is the time to take action to reduce debt and create a solid plan for investing and saving.
Our advice? Make paying off the debt (student loans, credit card balances) a priority. Get it out of the way. Once done you can focus on other goals. Arrive at a number you can afford to contribute to your overall debt and set up an automatic payment plan so money is allocated monthly towards debt repayment.
This strategy ensures that the money does get applied to the debt and doesn’t find its way into your hands. What you don’t have in your wallet, you won’t spend. If you have multiple credit cards, pare them down to one or two. It’s easier to control spending and by consolidating your debts, you’ll be better able to keep track of your spending. Make a budget that reflects your earnings and includes all your expenses.
In our experience, there are some fundamental rules that anyone in young maturity ought to think about as they cross the threshold into their wealth-building years. Here are just a few of them.
- Learn to negotiate. This goes for everyone, but especially for women since women are 2.5 times more likely to have a ‘great deal of apprehension’ about negotiations. According to Linda Babcock and Sara Laschever, authors of Women Don’t Ask, failing to negotiate your first salary and starting your career at just $4,000 less than a comparable man can result in a career income loss of over $500,000 by age 60.
- Save a higher percentage of your income. The difference between saving 10% of your income (which is the rule of thumb) and 20% of your income is significant over a lifetime. A 25 year old who makes $50,000 a year and saved 10% of income would have over $800K at age 65, at a 6% interest rate. That doubles to over $1.6 million when you save 20%.
- Learn how the tax system works. So, you’re working now and finally making some money – however, you don’t want to give it all to Revenue Canada. Now is the time to learn some basic tax strategies. Explore opening a Tax Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). Understand the difference between the two. Being proactive about your taxes can save you thousands of dollars annually and it will pay off down the road.
- Spend Less Than You Earn and Invest the Difference Wisely. The reality is that if you want to build wealth you will need to create a gap between what you earn and what you spend. This is the most fundamental of fundamental truths. In a fascinating article published recently in The Globe and Mail (April 25, 2017) writer Brenda Bouw made a significant contribution to this issue: Four investing lessons millennials should learn before they turn 40.
Make strategic money decisions
No more throwing money into random savings and investment accounts and figuring out what to do with it later. Investors need to be more strategic, says Susan Daley, associate portfolio manager at PWL Capital Inc. in Waterloo, Ont. At least by the time they are 40, millennials should be socking away money into either a tax-free savings account (TFSA), a registered retirement savings plan (RRSP) – or both – and taking full advantage of any employee pension or stock plans when available.
Figure out the right asset mix, and tolerance for risk
For most investors, the agony of the 2008-9 market crash is starting to fade. ‘They’re starting to forget the pain of losing a large chunk of assets,’ says Ms. Daley. Many millennials didn’t own stocks at that time, or their assets were so small they didn’t lose a lot of money. Still, they likely saw what their parents or older siblings with more money went through, and read a lot about the fallout on social media.
The lesson, Ms. Daley says, is to have a mix of investments, such as cash, bonds and stocks, based on an investor’s personal risk tolerance. That can help them prepare both financially and emotionally for a downturn. ‘Nobody likes to lose money, but if you understand that it’s part of the process of investing and embrace that, then you’ll actually do better over the long term,’ Ms. Daley says. ‘Investors need to understand that investing in stocks and bonds is possible, and really a requirement to earn a return on their money,” adds Ms. Daley. ‘The sooner you learn this lesson the better off you’ll be because of compound returns.’
Resist temptation to time the market
Donald Trump’s election as U.S. President last November is a textbook example of why investors shouldn’t try to guess which way the markets will go. Futures on the Dow Jones Industrial Average were down more than 900 points in the hours after Mr. Trump’s surprise win. They rebounded shortly after markets opened the next day and North American indexes have since hit record highs.
The lesson for millennials, and all investors, is to not try to predict what the markets will do. Instead, stick with a financial plan – paying attention to goals, asset allocation and diversification – and sit tight.
The Wooding Group, 780 498-5047