Real Money Management for Millennials
There is no shortage of articles and lists around the internet aimed at helping Canadian Millennials (those born between 1980 and 2000) better manage their money. So what makes this one different? The other lists don’t understand how we Millennials shop, save, and even interact with the world. Others make broad statements or generalizations that may even be out of reach for Millennials; for example, it doesn’t help to tell a 21 year old university student to invest and have a savings plan before they understand the fundamentals of such things – especially if their hourly wage is $12.
So, this list will be a bit different – it will act to inform as well as to advise, and hopefully help to de-mystify money, savings, and spending. Maybe even tell you where it’s OK to spend a little. Also, at the end of the article, I’ve linked a basic budget template with a basic debt repayment calculator for students.
Get a Student Bank Account
If you’re a student, and you don’t already have one, get a student account. Most banks and credit unions offer special low-or no- fee checking accounts for students. You might be able to save $10 or more per month, but more importantly you’ll be able to track your spending through your online banking. The ability to track spending will be a big help in the ‘budgeting’ section later in this article.
Student accounts can also offer nearly unlimited debit transactions per month. Paying with plastic can help avoid ATM fees and provide you with a traceable record of every purchase you make – again helping with your budgeting process.
Saving and Investing
The classic example shown to young people in terms of the importance of saving is the idea of compound interest. You may even have come across an example of the “if you save x per year from when you’re 20 until you’re 30, you’ll make y by the time you’re 65 – but if you save the same amount from 30 to 40 you’ll only make z” in this model, z is often half of x. To get an idea of whether these models are out of touch with today’s youth, just look at the interest rates they cite: often 6-7%. Good luck finding a savings instrument in the current economy with that sort of risk free return.
Compound interest exists in almost every investment vehicle – it just means that you earn interest on the interest. For example, you open an account with $100 in it at 4%, assuming annual interest for simplicity’s sake, at the end of the year you have $104; then the next year you earn interest on the $104, and so on.
For Millennials today, getting into the habit of putting money aside is more important that thinking about the effect of compound interest. Further, there are a number of options in terms of savings tools to use. Although the purpose of this article isn’t to provide detailed advice or analysis on which investment tool to choose (this is a conversation best had with a savvy financial advisor or with your bank), often it makes sense for Millennials to invest in a Tax Free Savings Account (TFSA) rather than an RRSP. Make sure to ask your bank or financial advisor about the differences between RRSPs and TFSAs to ensure you get the one that is best for your needs.
Use a budget to decide on an amount of money you can put aside every month (or every two weeks), and do it – set it up automatically and monitor the growth of your savings. As your income level or budgetary needs change, you can always revise your contributions.
Be Wary of the ‘Deal’
There are all sorts of deal websites out there: from group buying sites like Dealfind and Groupon through flash sale sites like Beyond the Rack or Gilt. While there can be great savings to be had from many of these sites, they can also be a spending trap.
Before you buy something, be honest with yourself and ask “do I really need this?”. It might be an obvious question, but you’d be surprised how often a second thought overpowers the will to make an impulse buy of something you don’t really need or can’t really afford. Also ask yourself if you would buy the item if it weren’t on sale – we often get enticed into making a purchase just because the deal seems to be too good to pass up; sometimes it is, most of the time it’s not.
Products and services listed on deal sites often never sell for the ‘retail’ price the sites suggest they go for. Do a little checking around online to other retailers who sell the same product to see if it’s really as good a deal as the website says.
Credit cards can be one of the most dangerous tools of financial self-destruction for Millennials. It’s hard to go to a hockey game, or even walk across a university or college campus without being offered some sort of free gift in exchange for filling out a credit card application.
There are entire websites devoted to advice on responsible credit card behaviour, so I’m just going to mention a few of the most important things:
- Your spending limit is not how much you should spend , it’s not a bank account – you should be able to pay off your balance every month to avoid interest charges.
- Carrying a big balance not only costs you interest, but can also hurt your credit rating.
- Stay as far away from store-brand credit cards as you possibly can: they often carry higher interest rates than others.
- Get one (and only one) credit card, and start with a low limit. If you can manage that, you can increase your limit over time.
- Opt for a card that offers a rewards system you’ll actually use (cash back, grocery dollars, etc.) and doesn’t have an annual fee. Treat your selection of a credit card like you would any product you buy, don’t just take the first one offered to you.
- If you move, make sure to update your address with the credit card company. You don’t want to forget about an outstanding balance – doing so could ruin your credit rating.
Every time you apply for credit (whether a credit card, bank loan, car loan, etc.) it is reflected in your credit history. This isn’t really a big deal for a few items, but if it becomes a habit your credit score can suffer. Credit cards aren’t all bad: they offer added security, are accepted all over the place, and allow you to shop online. But they can also lead you to overspend – be careful.
Another essential step to understanding credit is to actually read your credit report. If you have a credit card, line(s) of credit, or loan(s), you should be checking your credit report on an annual basis. Canada’s two major credit reporting agencies are TransUnion and Equifax, and although they charge for online reports and credit monitoring services, you are entitled to one free report per year from each – mailed right to your door. Taking the time to look these over every year and correcting any errors can save you enormous amounts of money down the road, as the interest rates you pay for car loans and mortgages are often influenced by your credit history.
Use Public Transit or Ride a Bike
Owning a car is sometimes a necessity based on where you live or where you work; if you really need it skip this part, but if it’s just a convenience, read on. Buying a new or used car can be one of the biggest financial burdens a Millennial can take on. Between repair costs, insurance, gas, and other incidentals your total cost of ownership may turn out to be much higher than you expected.
Walking, biking, and taking the bus are all effective ways of getting around that can give you some exercise and save you a bundle at the same time (plus transit passes are tax deductible in Canada). For those trips where you might need a car, you can always rent one – they’ll often run around $30 per day and don’t come with all the burdens of ownership. If you find yourself renting often, look for a credit card that provides rental car insurance (remember we talked about getting one with benefits you’d actually use?).
Arguably the most effective and universal tool for financial planning (Millennial or otherwise) is a good budget. This simple document lets you plan your spending, understand your cash flow, and know what you can and can’t splurge on. That said, it’s also one of the easiest planning tools to get wrong.
A good budget must be an accurate depiction of your actual spending patterns, not just your ideal spending. Start by cataloguing all of your expenses for at least one month – keep track of everything, not just the big things or the necessities. If you pay with debit or credit often, it becomes a little easier as you can export usage histories from your online banking site.
Once you have at least one month worth of data, start building categories in your budget: rent, household expenses, groceries, bars, restaurants, etc. Be specific enough that you understand immediately what each category refers to. I can almost guarantee that you are spending more in an average month than you think.
At the bottom of this article is a link to a very simple budget template. If you download it and fill in the categories appropriate to your needs and situation, you can start to develop a clearer picture of your own finances. It also includes a rough loan repayment calculator to help give you an idea of how long it will take to pay down your student debt. This is not meant to replace the services of a financial planner, but can help to give you a better sense of your finances. Also keep in mind that this budget template is designed to help manage your day-to-day costs of living, not for large, predictable expenses like tuition or books (unless these are paid with a loan or line of credit; the budget does account for those).
As you build a more accurate picture of your financial position, you can start to tweak categories and alter your spending habits to save more, pay down debt faster, or put aside enough money to take a trip or buy a new game console without going deeper into debt. If you are comfortable with integrating your financial information into a third party company, then services like Mint.com can give you a one-stop solution for monitoring and tracking your cash.
Manage the Little Things
Plenty of financial advice articles will advise Millennials to give up the ‘little things’ like the daily coffee in order to save a few dollars. But being financially responsible doesn’t mean cutting everything out of your routine. What is important is using a budget and having an awareness of your finances to make smart choices about where you can spend your money. For example, if you buy a coffee every weekday morning at a cost of $2.50, you’re spending somewhere around $600 per year.
If it fits in your budget and that coffee is an important part of the start to your day, you may derive more enjoyment out of drinking it than you would out of the $600. What if you switch to a home-brew, would you still get the same enjoyment? Maybe try it out. Those are the questions to ask yourself: don’t just look for things to trim, it’s important to weigh them against your ability to pay and your enjoyment – you only get one shot at life.
It’s important to remember that saving, spending and budgeting must be sustainable – not only in terms of your financial position but in terms of your quality of life as well. If you feel like you’re punishing yourself, you are much more likely to deviate from your budget.
Almost everyone, at least at some point in their lives, feels stressed out about money and personal finances. It’s normal. Hopefully, some of these tools and suggestions can help shed some of that stress or make you better prepared to deal with your personal financial situation in the future.
Remember, if you’re having trouble with finances or financial concepts, you’re not alone – especially with investing. Don’t be afraid to ask questions of qualified people or do some reading on your own, but keep in mind that everyone has a point of view, and what works for them may not for you; there’s no magic bullet or guaranteed investment.
When it comes down to budgeting and personal finances, you are perfectly capable of developing, maintaining, and adhering to a personal budget if you are careful, calculating, and honest with yourself as you build it. Honesty is key: there’s no value in a budget you can’t stick to.