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Millennials’ top 3 financial priorities - Pay debt, own home, fund retirement



 

According to the Ontario Securities Commission (OSC)*, millennials – people born in the 1980s & 90s – are the largest contingent in today’s labour force.  Roughly aged 18 to 38 today, this demographic cohort spans those deciding what interests to pursue, to those now hitting stride in their chosen field.  

At the personal financial level, it runs the spectrum from emerging from full dependence on your parents, through your own independence, and on to being someone on whom others depend.  

The OSC recently surveyed Ontario millennials to get a sense of their investment practices, attitudes and behaviours.  On a high level, here is what came out.

The pre-priority: Saving 
Millennials do save, or at least 80% do.  That doesn’t explain much on an individual basis, but it reinforces the collective wisdom.  From there, the top three financial priorities are reducing debt, buying a home and saving for retirement.

Like any journey, managing finances can be overwhelming to tackle all at once. The necessary first step is to manage spending so that you have savings to work with.   

1.  Get that debt
Debt allows you to obtain things you need at times in your life when you don’t have the immediate financial resources to afford them.  Eventually though, you must pay it back, and in the meanwhile pay the cost of carrying that debt.  More than 80% of millennials see this as very or extremely important, with it being the top priority for 1 in 5. 

Whether it’s student debt as a headstart, a consumer loan to get ahead, or a credit card that has gotten ahead of you, these types of debt are costly.  With the exception of some regulated student loans, interest payments are not tax-deductible.  That means you have to earn income, pay tax on it, then use what’s left over to pay your interest – and that’s even before you pay down the principal, which is also non-deductible.

Of the three financial priorities, you should make debt reduction proportionately the largest priority in your mind, if not your wallet.  This will free up your cash and concentration to address the other two priorities more effectively.  

2.  A home of your own
Homeownership can provide stability, though renting often aligns better with a mobile/flexible lifestyle, especially early in life.  Carefully consider your motivations and financial capacity before deciding if and when to take the plunge as a homeowner. 

For millennials in the last half decade, ownership fell four percentage points, which still kept it in line with rates in the 1980s & 90s, at around 40-45%.  This time it has been fueled by low interest rates and by almost half of first-time homebuyers receiving gifts or loans from parents.  However, close to 2/3 are left feeling cash poor after housing costs, with half concerned about meeting mortgage payments if interest rates rise.

If you are a would-be owner, you should stress test your capability by researching and analyzing the full financial commitment of ownership.  Once you have determined that figure, set aside the difference above and beyond your rent every month.  Your expected down payment (less existing savings) divided by that difference is roughly the number of months until you’re financially ready to commit.  If you find yourself having to dip into those savings, then you need to reassess your resources and timing expectations. 

3.  Moving from saving to investing
While it appears that millennials are ready to save, the same blanket statement cannot be made about investing.  Less than half are investing those savings.  Of non-investors, the majority are held up by other financial commitments and debt repayments.  Even without those constraints, almost 60% say they delay because they don’t understand investing.  

All hope is not lost though: the OSC survey shows that as millennials age, investment understanding rises.  By regularly gathering information, you not only build your store of knowledge, but also the comfort and confidence to know when and how to use it.

On that last point, among your millennial peers 46% have no plan as to how they will meet their financial goals. And of those who claim to have a plan, only 13% have it in writing. 

Understanding investing may be a long haul, but understanding yourself is always within reach.  Take the time to sort through your own financial priorities, and put that into a written plan, even a simple one.   As your knowledge grows, you can get more sophisticated, but for the time being the task at hand is to get started. 

Speak to your Meridian Wealth Advisor for perspective on these important issues.


* Reference from the Ontario Securities Commission http://www.osc.gov.on.ca/documents/en/Investors/inv_research_20171127_missing-out-report.PDF and http://www.osc.gov.on.ca/documents/en/Investors/inv_research_20171127_missing-out-survey-results.pdf

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