It’s Official, Young Canadians Need Financial Help

I thought I had more saved!It must be terribly frustrating to be a twenty-something today. It’s hard to find work; you probably still live with your parents and a whole culture has developed around criticizing your generation. But beyond the superficial criticisms directed at twenty somethings, there are structural shifts going on within the economy that are making paupers of the next generation.

Some of these shifts do extend from things like a lack of good paying jobs in manufacturing and an increasingly reliance on service sector jobs. There are many university graduates that now find themselves in work that they are overqualified for and underpaid in. But some of the changes also come from an increasingly high cost of living that is making it financially untenable to move out of a parents’ home. This phenomenon has been dubbed “boomerang kids”, or “boomerang generation.”

The challenge that the Millennial generation is facing is that costs are rising as a proportion of their income. Consider the cost of a house in Toronto. In November of this year the average cost of a home sold in Toronto was $538,881, up 11.3% from November of last year. Assume you make the minimum downpayment to get a home, 5%, your downpayment would then be $26,944 (roughly).  Your monthly payment on a 25 year fixed rate mortgage would be $3,077 per month, or close to $36,924 per year. If we factor in real-estate tax and an average heating cost, that would bring annual costs to roughly $43,000 a year. That would mean that to qualify for the mortgage with a bank you would need to be earning at least $134,375 before taxes. The average income in Canada is $47,000.

We can quibble about how accurate these numbers are, but it would still amount to the same end. It costs a lot today to be like your parents. Buying a house for the first time is incredibly expensive and forces young people to make different choices about how to spend their money. For many millennials this has meant “postponing” growing up, financially as well as spiritually. But what today’s young generation actually need is a working budget that lets them get a big picture of their spending and allows them to set and reach financial goals. There are free services, like Mint.com (which I am very much in favour of), but even better is that young people should be encouraged to seek out professional financial help. People with a small amount of savings often feel discouraged about seeing a professional, but getting this guidance early on can lead to significantly better financial outcomes, comfort with the markets and wiser tax efficient planning!

Want to discuss your future planning?

That Latte Makes You Look Poor – Great Advice for Young Investors

full-leaf-tea-latte

In the long fight to encourage people to save money, there is a theory that the money we fritter away on small treats is actually bankrupting us. Coined “The Latte Factor” by David Bach, a personal finance guru formerly a Morgan Stanley broker, it caught on like wildfire after he appeared on Oprah in 2004. Already the author of the popular book Smart Women Finish Rich, David’s idea was that the small expenditures on things like Starbucks lattes, the occasional lunch out and other “treats” that we give ourselves were bankrupting our future.

But the devil was in the details. According to author and former personal finance columnist Helaine Olen, David Bach’s latte factor wasn’t true:

 It didn’t work mathematically. It didn’t work in terms of what we were actually spending our money on. And it didn’t take into account what life costs were actually rising or falling.

– From Pound Foolish: Exposing the Dark Side of the Personal Finance Industry

As the reality often is with personal finance gurus, they need a hook, and Mr. Bach had a great one with the “Latte Factor” (a term he’d trademarked no less). But to make his numbers more impressive he would fudge them and round up, forget inflation and taxes and grant a very rosy investment picture so he could demonstrate his luxury cutting routine could equal millions of dollars saved.

But while Helaine Olen may have sussed out Bach’s faulty math, I don’t think the idea is a total waste.

Lots of 20 and 30 somethings struggle with saving. Retirement seems so far away as to be in another galaxy. Debt is normally quite high, either because of student loans or because of mortgages and new families. In other words lots of money is being funnelled into cost of living and debt repayment and little money finds its way into direct investments.

But lots of young people do drink lattes. And go out on the town. And eat out. In other words people between the age of 20 to 35 do have lots of money that is being spent on small luxuries. Getting a hold of those costs could easily lead to small, but incremental investments.

Now is the time to turn away from flash finance gurus like Mr. Bach and towards the steady hand of  David Chilton and his seminal book The Wealthy Barber. 25 years after it was first published it still has some of the best advice about saving that anyone can take. Pay yourself first! Set up an automatic withdrawal on your pay-days and put it into your RRSP or TFSA. You won’t notice its even gone, and you’ll thank yourself later.

Need help getting control of those little luxuries? Check out mint.com – a free site that can help you budget, or give us a call to discuss some easy ways to save.