Today we are all trying to find out where we are on our financial roadmaps. Some of us are at the start. Some of us are nearing the finish line. Most are in the middle of the road like millennials. Given rising interest rates and inflation, recent surveys say millennials are worried about how to meet daily expenses, let alone save for a house or retirement. But most advisors will tell you that there are always ways that advisors can help them do that.
When you’re younger, you really need to have some discipline about what you’re spending your money on, and it can be tough. Many millennials have learned that as a result of the pandemic. They realize that you can’t be too frivolous. Not buying lattes is such a cliché, but now there are half a dozen streaming service that each cost $20 a month. On top of that, they have crazy cell phone plans. The amount we spend on telecommunications and entertainment is much more than when I was younger. I think that’s crept up as a proportion of younger people’s budget.
Control over your cash flow
At Northern River Financial, we like to employ a multi-step process that can help our younger clients address things like that. First, we need to help them take stock of their financial situation – their net worth, personal balance sheet, bank accounts, pensions, real estate, and liabilities, including everything from mortgages and student debt to outstanding credit card balances. We can then help them manage their cash flow to cover household spending, debt repayment, retirement funds, and other expenses.
We can next help younger clients determine their financial goals – whether that’s paying off high-interest debt, such as credit cards, saving for retirement, or paying for children’s tuitions.
Then, we can assist clients create a financial life plan for how much they’re going to save and invest, including RRSP and TFSA contributions, and start implementing it to ensure they meet their goals.
Finally, we review their plan annually to see whether they still have the same goals or whether their cash flow has changed, and anything needs to be readjusted.
Goal re-alignment
Going through this process, millennials may discover their goals and resources don’t align. But they can still meet their goals with some work or other adjustments.
When you’re younger, you may have to make some sacrifices. You can’t have everything you want because you just can’t afford it. So, people should make a conscious effort to figure out how much they want to save for a down payment every month. For us, it was $3,000 a month, so we did everything we could to hit that $3,000 mark. But it came at a cost. We gave up on things. Nice to haves. We couldn’t go out with friends every time there was a get together, so we did that selectively. We lived in an apartment that was affordable. We were always really conscious about our cash flow and making sure that we were saving and meeting our goals.
That can come with a certain element of personal sacrifice. But, when you look back on those years, you feel good about them. Yes, it can be uncomfortable, but it’s the right thing to do.
Look to alternatives
There are other ways we encourage clients to make adjustments to better reach their goals too. Besides trimming on the expense side, more people may find themselves following the European model and renting more than buying a home. There’s no shame in renting. The concept of home ownership has gone through some dramatic shifts in the last two years making it more unreachable. While rental rates have increased, they are still palatable.
Millennials can seek to increase their income by asking their bosses for a cost-of-living inflation increase to their salaries. Surprisingly, many employers are not providing it or now are expecting to be asked. You can’t get what you don’t ask for especially in our current climate of inflation. They could also find a better paying job since employers are searching for good talent in this tight labour market. Many are making significant enhancements to compensation to attract talent. There seems to be more jobs out there then candidates. Some people are also making different work choices given their experiences during covid.
We are always encouraging younger clients to start saving in their 20s and 30s because they’ll then have 40 years for their money to compound. Generally, whatever they can contribute will double within a decade, which will help them fund their goals as they age. Those who start early can also use equity investments more than fixed income investments to grow their wealth and turn to the safer bonds in later years. As you age, your investment risk tolerance will change and you will move to safer waters.
If people, even older ones who may have paid off their mortgage or launched adult children, end up with more disposable income, they can also beware of the temptation to spend more in a lifestyle creep, and put most of the extra in investments to buffer their retirement.
The bottomline
While all this advice holds true most of the time, we must respect that things have been exceedingly difficult during the pandemic, and it may have been difficult to adhere to. Transitioning through the pandemic and trying to return to a new normal, we have now been hit with global supply shortages, record reaching levels of inflation, and an impossible real estate market.
But that goes along with a warning that parents should encourage millennial children to be financially independent, despite these difficult times, rather than continuing to treat their parents like ATMs. It concerns me the degree to which children are looking to their parents for funds to assist their attempts to acquire their first homes.
Sometimes I don’t think we look early enough. It can start with finding a job in high school and help them learn to survive on their own while meeting their financial goals, gaining their own sense of accomplishment as they seek to reach their goals in today’s economy in a strive to Keeping Life Current.
