Canadian Personal Finance For Millennials
I love that the internet has made it so easy to research just about everything.
Yep, that includes personal finance! BUT, sometimes that information can have problems. It’s not really geared towards our age group, it might be kind of stuffy and boring and, the worst offence, it’s not Canadian! Which can leave us totally confused about what specific advice we should pay attention to, and what is completely not applicable.
As a Canadian Millennial myself, I can totally relate.
So today, I’ve gathered up all my best information to give you sort of a ‘Personal Finance 101’ rundown. Specific for Millennials, and specific for Canadians!
Introduction:
Millennials are defined as anyone born between the years of 1981 to 1996. Today, that means we span in age from 23 - 38.
Financially, we’ve had a pretty rough time. According to Statistics Canada, Millennials have the highest debt to after-tax income ratio among generations. Over 1.7 times more than when Gen-Xers had when they were our age, and 2.7 times more than our baby boomer parents.
So, it makes total sense that we’re a bit misunderstood in the financial world. It was much easier for, basically everyone else, to do the things you’re supposed to do. Like, move out of your parents basement, buy a house of your own, save for having a family, whatever our ‘adult’ goals might be.
In an effort to help you understand what financial advice is truly important and applicable to you; here are the top things you should be doing to live your best financial life.
Money Management:
The first thing we need to talk about is BUDGETS. I know, that bad b-word. As soon as I say budgets I get the eye roll and the ‘oh well I don’t like to restrict myself sooo’ Budget is just a plan for your money. It’s a direction, it gives the money you’re earning PURPOSE.
If you’re not actually paying attention to where your money is going then you have no foundation for anything else. To manage your money, you actually have to MANAGE your money. That means you have to create yourself a budget, you have to have some financial goals and priorities, you have to decide how much you’re going to spend and how much you’re going to save, and WHY.
If you don’t have a budget, or want some help changing up your current one, head on over to my How to Budget Video and get started with your own money plan! It’s the first step and it will make your life so much easier I promise!
Savings:
The second thing I want to talk about is Savings!
I know you’ve heard it before, the old adage: pay yourself first. It’s no good having money and just spending it all away. We want to make sure our future priorities and goals are being built into our money plans.
This can be tough for us, because we’re the first generation really growing up with the internet and the new era of technology. I know, that sounds totally unrelated, but just let me explain.
The internet has made things incredibly easy. If we’re wondering what time that Dollarama down the street closes or who that actress is in that one movie, we can instantly look it up in the palm of our hands. I love it, it’s super convenient. BUT, it sort of primes us for instant gratification. We’re used to getting things right away, and, not that it’s a bad thing, but it DOES mean that we’re a bit unbalanced. We’ve got tons of practice on hitting the quick small wins, but almost no practice in the patience of waiting for a larger payoff.
For me, this is where my savings really thrived. Actually understanding my goals, WHY I was saving money, and reminding myself of that, was really the key to developing that skill.
I suggest getting clear on what your values are. I’m going to link a post I did on How to Make Smart Financial Goals, and a Values Worksheet I developed!
Actually thinking about your future, and then putting that plan in action to reach those goals is totally going to change your outlook on money management. You’ll never be able to afford a house if you don’t actually save for it. You’ll never feel secure and comfortable in your life if you don’t have an emergency fund.
As millennials, it’s hard for us to override that temptation of spending on something tangible. That week-long vacation to costa rica all our friends are taking, the latest iPhone, or that yummy looking restaurant that just opened down the street, it’s not a BAD thing to spend on that stuff. But if it comes at a cost of the things you want in your future then it IS something you’re going to have to look at. Reminding yourself wherever you can about those big picture goals you’re working towards will go a long way in overriding those urges and putting money back into your bank account!
Emergencies:
Now, I mentioned emergency funds in that last one, so let’s talk about those for a second. If you don’t know, emergency funds is basically the money you’re always going to have on hand in your accounts just in case anything happens. You lose your job, your car breaks down (though hopefully you’re saving separately for that), your apartment floods, something crazy. You don’t live with your parents anymore, and even if you do, you don’t want to burden them with your financial issues so take responsibility for yourself.
Now, in terms of the amount you should have in this fund, there’s not really a clear understanding among financial experts. I’ve heard everything from $1,000 to 6 months worth of living expenses. My advice? Treat it sort of like a ‘job loss’ fund. Know approximately how long it would take you to get a new position in your field if you lost your job, and prepare for that. ie. Someone with a super common or general field like ‘administration’ could have 3 months worth of living expenses on hand while someone with a more complicated career like maybe ‘veterinarian’ or something like that would want 6 months or more. (Let me know in the comments down below if you’re a vet, is it hard to get a job in that field? I’m totally just guessing!)
I’m going to be making another post next month on emergency funds, so if you have any specific questions, please let me know in the comments and I’ll try and answer them in that!
Debt:
Alright, the big one. Let’s talk about DEBT. I already mentioned our debt to income ratio, we’ve got the highest compared to all generations before us, and a lot of that is because we’re the most educated.
In Canada, about 70% of us have a post-secondary degree compared to 55% of Generation X when they were our age, and about 24.4% of us carried student debt from that education compared to 14.8% of Generation X in the same time period.
So, what do we do about it? I think the major things we worry about with debt is number one, how the heck to pay it off, and number two, how to actually integrate it into the other financial advice we’re getting, ie. when should we worry about investing our money or saving for our goals during debt payoff.
Paying off your debt is easy. Ok, it’s totally not easy, but PLANNING it is! The best thing you can do for your debt is to have a plan to pay it off strategically. Now, I won’t spend too much time on this, because I also made a post on this topic: How to Get Out Of Debt Quickly but what I mean here is basically don’t just throw extra money whenever you can at your debt and expect it to go down. You want to actually understand how much debt you have, the interest rates of those debts, and how much you’re REGULARLY going to contribute to it in order to make it disappear.
Integrating debt payoff with the rest of your money plan is a bit more complicated. There are… literally SO many financial advisors out there with a million different opinions on this. Please, find the one who resonates the most with you, because there is no ONE WAY to do this. However, I’m going to give you my opinion, and that’s that you shouldn’t put the rest of your financial life on hold while you’re paying off debt. I know, controversial topic. Debt is bad. Obviously get rid of it as fast as possible. BUT, the reality is, debt payoff, especially if you have HUGE debts, is going to take you YEARS. You can’t put your whole life on hold for that long.
Always be contributing to your debt, but don’t forget about those other goals you made. Emergency funds, vacation funds, all of those should be getting regular money to them even if it’s something minimal like $20 a month.
In terms of investing your money during debt payoff, here’s my thought: take it by interest rate. The approximate average return on the market has been from 5-10%. If your debt has an interest rate of higher than 10%, pay that sucker off. If your debt has a smaller interest rate, then you can afford to spend a little more time with it. It’s no use putting extra money towards debt when you could be taking advantage of market returns at a higher rate.
Building Credit:
Once we DO put a dent in that debt and finally earn enough to get out of our parents basements, we’re going to be wanting to look to the future which might mean taking on some pretty big loans.
That means paying attention to our credit so we can get the best rates from lenders. Again, I’ve made a post on this topic: What is a Good Credit Score in Canada? so check that out if you want to know more about how to do that.
Identity Theft:
One thing I do want to mention here though is that looking at our credit isn’t just for getting good rates on loans. It’s actually to prevent identity theft. You want to be regularly checking your reports to make sure that everything is as it should be. One of my favourite resources for this is Borrowell* they help track your credit for free, check them out or read this post on How to Find Out Your Credit Score for more information.
Retirement:
Now, let’s talk about the big elephant in the room. Retirement. Hopefully I didn’t bore you with all the rest of the information because THIS ONE is the MOST IMPORTANT POINT.
As millennials, most of us are pretty far from retiring, so it’s not at the top of our minds. But, the earlier you start saving, the less of your own money you’ll need to put in to reach your goals. This is because of compound interest which basically means you’re earning interest on your interest.
For example, say you start saving for retirement at 25, you invest $100 a month and retire at 65. Assuming a conservative yearly market return of 5%, you’ll have about $152,000 in total from putting in approximately $48,000 of your own money.
If you don’t start saving until age 35, reaching that $152,000 will mean almost doubling your monthly payment to $183 per month, and putting in almost $66,000 of your own money.
The scary thing is, you’re going to need WAY more than $152,000 to retire! Check out this Compound Interest Calculator to figure out what you’re actually going to need for retirement and how much changing that monthly payment would make a difference in reaching that number!
Retiring in Canada vs. US:
Before we move on, this is a Canada-specific post so I want to highlight the differences between Canada and the US. In Canada we have 2 types of government retirement benefits. CPP which is the Canadian Pension Plan (that’s what we’re paying into during our working year) and then OAS which stands for Old Age Security (we get this regardless of if we worked or not). In the US, I’m pretty sure they just have one program, called Social Security (as far as I can tell, it’s most like our CPP program). Whether you live in the US or Canada, these government programs are NOT enough to get you through retirement. I think as a teenager, when you get your first job you’re like what IS THIS tax they’re taking from my paycheques?! and you figure out it’s for retirement and then you’re like alright, well I’m covered.
But the average CPP payout per month, is $683.65 and the maximum OAS benefit you can get is $607.46
That means if you save nothing for retirement, you’ll be living off of like $1,200 a month. I don’t know about you, but my monthly costs are more than that. With inflation, that amount will be worth even less than it is today and it will be even harder.
401K / Pension:
One thing that they always spout in US articles is contributing to your 401k. Again, I think they only have that one program there so maybe that’s why 401k’s are much more important to them (also, the cost of healthcare; I have no idea how they manage that during retirement!) But in Canada, we DO actually have something similar. We just call it a pension. Sometimes your work will have an employer match program where they’ll set up a pension for you (basically a retirement account) and they’ll put in an equal amount that you contribute up to a certain percentage. So I know at my last job I put in 4% of every paycheque, and they matched it giving me a total of 8% contribution. A lot of the times, these are opt-in benefits, which means you have to tell your company's HR rep that you want to be a part of this program. Please look into whether you have this program at your work, because it’s literally free money that you could be leaving on the table!
Insurance:
This one, I don’t actually have a lot of experience with, but I still want to mention it because millennials span a wide age group and your situation might be different than mine. One of the last sort of ‘adult-y’ things we have to get figured out is insurance. If you have anyone that depends on you financially, like a child, or a spouse, look into insurance. It’s tough to think about, but you want to be prepared in case you die or get seriously injured unexpectedly. You also want to look into getting a will prepared. I know, it seems like stuff only your parents have to worry about, but things happen. Even to young people, and it’s actually cheaper in the long run to get insured now when you’re healthy rather than waiting until you might actually have some problems that will cost you more. Again, I’m not an expert on insurances or products like this, but I know Jessica Moorhouse (another amazing Canadian Money Expert) has made some great post around it. Check out her posts on: Making a Will, Getting Home and Car Insurance, and video on Life Insurance.
Community and Motivation:
The next thing you’re going to need is a supportive community!
Financial stuff seems difficult partly because it’s shrouded in this air of mystery. It’s taboo, no one wants to talk about how much we make or what we’re spending it on. It’s dangerous because it can leave us uninformed, and embarrassed. It can give an immense amount of power to the employers who make our salaries, the financial services that sell us products, or the marketers trying to get us to spend our money.
Take back that power, and start breaking down those barriers. I’m not saying you have to broadcast how much you’re making at work, or brag to the world about all your purchases. But get a few close friends, and make it normal to talk about money with them. Find yourself a community of people who you don’t feel embarrassed around, that you can be honest and open with. It might seem weird at first, money isn’t easy to be vulnerable with, but once you start, I bet you’ll find that your friends are feeling just as confused and alone as you are. Don’t try and go through your financial journey alone, build a supportive system to go through it together!
Let me know in the comments down below if this helped you out! What are your top personal finance tips for Millennials in Canada?
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