If you’re a millennial today, you have a lot on your mind. Between your career, buying a house, and starting a family, it can be tough to fit savings into the mix. A common dilemma faced by today’s youth is whether to focus on saving for retirement or paying down student debt. Contrary to popular belief, neither are mutually exclusive; with discipline and the right financial road map, your financial dreams can become reality.
The New Retirement Reality
When it comes to retirement savings, the onus has shifted from employers to employees. Today fewer than 60 per cent of workers are covered by a workplace pension plan and that’s only expected to get worse. In a consumerist society of cheap credit, where savings have gone by the wayside, you could be in for a rude awakening come retirement. You should be prepared for a 30 per cent on drop in your standard of living on average in your golden years. Rather than accept this bleak retirement reality, millennials can take some important steps today that will pay big dividends in the future.
Time is on Your Side
The biggest advantage millennials have is their youth. “The first they have is time in front of them”, says Ernesto Salvi, a financial advisor at Edward Jones. “It’s the concept of time and investing that is often forgotten. At the end of your career, three key retirement variables have been at work: returns, how much you’ve invested, and time. Time is something you cannot buy. If someone is 25, it’s a huge advantage. In a decade at seven per cent return, you can double your money.”
The Latte Effect
Stop trying to keep up with the Joneses – they’re broke. Overspending is a problem frequently faced by millennials. Sixty five per cent of this group feel they overspend, according to a recent poll by TD. So how is this frivolous spending being paid for? It’s being financed mostly through credit and at the expense of saving. Seventy one per cent of millennials feel like they don’t save enough, the poll reveals.
“They will be facing several challenges,” says Salvi. “The major challenge is money has never been so cheap and access to credit has never been so easy. It’s going to be easy for them to borrow and borrow a lot of money. Excessive debt is something I would warn against.”
Put A Stop To Needless Spending
Spending today is easier than ever; you can now buy a Frappuccino from Starbucks with your smartphone. Although it’s a lot more convenient to spend, it comes at a cost. “It’s important to not only pay attention to the big ticket items, but also to small purchases like lattes. Impulse spending remains hardest to control. We went from a society based on cash to a society where it’s easy to spend money. We spend, but we don’t feel it.”
Don’t Be Too Focused on Returns – Yet
It can be easy to throw your arms up in the air and give up on savings. Hearing you need a $1-million nest egg to retire comfortably can seem impossible. By starting early and regularly setting money aside through an automatic savings account, though, you’ll be well on your way to a decent retirement.
“You don’t have to save a lot, but you have to start early,” says Salvi. “Let’s say your goal is to have $1 million at age 65. Using seven per cent, you only have to save $400 a month if you’re 25, but if you’re 50 you need $3,000 a month – almost 10 times as much.”
Millenials Have Some Advantages
It’s not uncommon for millennials to stay at home longer, as they pursue their post-secondary education and find their first jobs. You should take advantage of the situation and get an early start on saving for your first house or retirement. “Some of them are staying at home longer than before paying little to no rent,” says Salvi. “Take advantage and pay yourself first. Instead of spending, pay rent to yourself. Take advantage and pay down debt. Use your TFSA to save money for a down payment on your first house.”
Salvi offers some words of wisdom for today’s young generation: “Millennials have their whole lives in front of them. I just hope that talking to an advisor will make them aware of the great opportunity that they have. They’re only given one life, so they better use it wisely.”