Does coming of age in the 21st century mean young Canadians are doomed, financially speaking?
I don’t think so. But, compared to their parents, things are certainly going to unfold quite differently for most of them.
Looking at my own 20-something children and their friends, I’d say it takes recent graduates at least five years longer to establish themselves than the previous generation. And, for some of them at least, that must seem like a lifetime.
It’s clearly not easy. Younger Canadians stay in school longer than their parents did. Add to this the fact that student debt levels have increased sharply, house prices have clearly been rising faster than income, and job growth is pretty much stagnant.
Younger Canadians Off To Slow Start
With fewer jobs to choose from and more competition to fill them, young adults have a tough time finding meaningful employment and struggle to turn entry-level jobs into careers.
As a result, they change jobs frequently, bobbing through positions that are lower paying, without benefits, and relatively less stable than those their parents enjoyed.
So it’s not that surprising to hear that roughly half of Canadians in their 20s still live with those parents, including 60 per cent of young adults aged 20 to 24 and nearly a quarter of 25- to 29-year-olds.
But not being in any hurry to leave, or moving back when their finances or relationships are in a tailspin, does at least provide this cohort with a unique opportunity, says financial planner Stuart Ritter in a report entitled A Road Map to Financial Security for Young Adults.
Small Steps Yield Big Results
Viewing financial planning as an arduous process, most young people simply put things off too long, Ritter maintains. But small steps early in adulthood can lead to big results over time.
He thinks the biggest obstacle for those starting out is not so much financial, but psychological. To be successful, younger people have to make a significant mental shift to right-size their expectations and perhaps their level of patience.
“Until they graduate college or high school, young adults have had their lives divided into four-month blocks,” Ritter says. “Their goals were oriented toward what they wanted to accomplish that semester or school year, from kindergarten onward.”
“Now all of the sudden, they have to plan for 3-, 5-, 10-, and even 40-year periods. They have to develop patience and foresight on a new scale.”
Develop Priorities Early
Once they’ve found a job, Ritter highlights four primary financial priorities for those starting out:
• Save 15 per cent of salary for retirement
• Get the right health and renter’s/homeowner’s insurance
• Pay off high-interest debt like credit cards
• Build an emergency fund to cover three to six months of living expenses
He also emphasizes that young adults need to work toward these goals simultaneously and that there are consequences to completely ignoring one to focus on another.
Don’t Miss Out On Employer Match
Like most ‘go get ‘em, kid!’ treatises, he’s clearly asking a lot. Saving 15 per cent of not much is a tough slog – but, as I’ve told my own children repeatedly, you have to start somewhere.
That means setting aside at least enough to receive your employer’s matching retirement contributions, Ritter argues, increasing your savings rate by two percentage points each year until you reach the 15 per cent target.
There is hope, however. According to TD Ameritrade figures, both Gen X and Gen Y started saving for retirement, on average, in their mid- to late-twenties. That’s nearly a decade earlier than those of my generation who, on average, started saving at age 35.
That’s certainly an improvement.