Millennials are facing all the risk and none of the reward in today’s financial realities
By Kate MacDonald and Philip Mullen
The milestones individuals experience throughout their lives come in many forms. Looking back to previous generations, milestones for all individuals were similar, regardless of personal situation: obtain employment, purchase a home, raise a family and retire.
Today, the milestones that individuals strive to achieve vary based on a range of life choices and financial realities. The traditional path that was once the norm is now rarely the path individuals take, given the increased mobility of today’s generation. Other financial milestones, such as long-term travel, humanitarian work, saving for a vehicle or other large purchases, are being prioritized before home ownership.
Millennials in particular — the largest generation of Canadians — are at a disadvantage
This shift means that the skills and tools required to be successful in the past have become outdated. The key to achieving success today involves providing the right education and tools at the appropriate times throughout an individual’s life. It’s simply not enough to provide training in the form of a seminar or lecture at a single point in time. Financial education, or access to unbiased, personalized information, needs to follow the individual throughout their life.
As old concepts of financial success give way to new realities, the importance of financial literacy and what it means, has evolved, making it a life skill that should be recognized and addressed in the classroom. Some jurisdictions are already taking action: Ontario, for example, announced in July that a new career studies program for Grade 10 students will include financial literacy.
Matching education to life’s realities
The general education individuals receive in high school, university and adulthood holds different value based on their life stage. This is also true of financial education. The financial decisions and realities of a 16-year-old high school student will look much different when compared to an individual that is mid-way through their career.
The housing market, lagging incomes and tighter regulations are requiring millennials today to work more to gain access to less
Millennials in particular — the largest generation of Canadians — are at a disadvantage. The housing market, lagging incomes and tighter regulations are requiring young people today to work more to gain access to less. In 1985, the average home price in Toronto was $109,094 and average family income was $31,965, meaning a home cost roughly 3.41 times the median family income. By 2015, the average home cost rose to $622,121 and family income only increased to $70,336 — meaning homes now cost approximately 8.82 times the median family income.
Old concepts of financial success continue to influence younger savers, however, home ownership may no longer be the benchmark for financial success that it once was. Having access to tools and financial advice early on can better prepare young people for the challenges they will face throughout their adult lives.
Facing financial challenges
Beyond real estate, millennials are faced with a number of financial choices and trade-offs early in their career, yet they often don’t have access to unbiased financial advice or the tools to support making the right decisions. Data shows that millennials choose to prioritize experiences such as travel over long-term savings, however, the financial advice they receive today is traditionally focused on paying down debt or contributing to a retirement plan.
When millennials do contribute to a retirement plan, they are most likely to be in a registered savings or defined contribution arrangement. In these cases, their long-term savings potential is affected by low interest rates, volatile markets and increased longevity — meaning they are taking on all the risk. From an organizational standpoint, employers are typically contributing a lower level of savings to these plans for employees as they no longer expect the individual to remain with the company throughout their career, especially as we move towards a gig economy. This can result in less security and increased anxiety among younger generations as it relates to their personal finances.
Beyond millennials, we are seeing more individuals affected by the financial burden associated with having children, which often results in people working reduced schedules or taking time off during critical times in the lives of their families. While the cost of childcare or taking time off for maternity or paternity leave is significant, organizations often don’t provide the financial tools to help them adjust their financial plans accordingly.
Strategies for success
Though the financial realities of each generation may differ, better education and access to tools is as important in all stages of life. To take control of your financial well-being, consider the following:
Set personal goals. We all know how quickly life moves. If you don’t take the time to set and assess your short-term financial goals, you’ll likely find that they don’t match your end game.
Take action. Even the most educated individuals with the best financial plans won’t reap the benefits unless they take control of their finances. Whether this means making monthly contributions to an RRSP, taking advantage of employer-match programs or simply redirecting dollars from your monthly paycheque into a savings account, delaying action only means lost time.
Automate. Speak with your financial institution to redirect a portion of your paycheque to a savings vehicle before it even hits your bank account. Take advantage of the options available through your employer.
Seek out multiple points of view.Talk to a financial advisor, colleagues, friends and family to test your plan. Use the data points from your conversations to inform your own view on how your finances are performing.
These strategies are only a starting point, but they provide a sound framework for improving your financial well-being. Whether you begin by implementing one or all of them, you are getting closer to financial success.
Kate MacDonald is the senior vice president and Ontario region leader and Philip Mullen is vice president and retirement solutions lead for Western Canada at Morneau Shepell.