Millennials are the largest component of the Canadian working population. We’re educated, hirable, and entrepreneurial. But, we’re also in debt. And despite having every piece of information available at our fingertips, it can seem overwhelming understand how to make an informed decision about our finances.
Marketing, technology, and social media encourage us to spend, and make it extremely easy to do so. We’ve made it acceptable and funny to be negligent of the money in–and not in–our accounts.
According to Ratehub.ca’s Digital Money Trends Report, confidence in retirement savings is highest amongst those who are 18 to 29, and those who are 65 and over. My interpretation is that our generation comes out of university with every ounce of confidence that we’ll have the high-paying job right right away. Having kids is a far-away thought and we’re unaware of how to start saving properly for retirement. Our confidence is ignorance. Then 30 hits (ouch, did it ever) and reality sets in. We’ve spent years starting our own businesses, or working for next to nothing at our “dream” jobs, and spending too much on dinners, drinks, travel, and luxuries.
Not to mention the cost of living is drastically different than our parents’ generations, we have longstanding school debt and it’s less common for companies to offer pension plans.
And unfortunately, government pensions are not enough. The Canada Pension Plan (CPP) currently maxes out at $1,092.50 per month (the average is just $629.33), and the Old Age Security maximum is $570.52 per month for single people. This means the most you can currently expect for an annual income in retirement is $19,956.24 before taxes. Benefits like dental and vision homecare, nursing, or specialized care like chiropractors are not covered in retirement.
Noted: not all millennials are completely unaware of how to manage their finances. But, whether you’re trying to decide where to start or you’re a seasoned saver, hopefully the three tips below will be a spark of inspiration or a welcomed refresher.
1. Start now!
As of your early 20s, you should save at least 10% of your annual salary (before taxes). And as your salary increases so should your savings. Debt repayment should be a priority so if 10% is unreasonable, you should still make sure you’re saving at least some money each month. The millennial age group spans from about 20 to mid-30s, so if you assume 7% compounded annual rate of return and have a goal to save $500,000 of your own money by the time you’re 65 you should be saving:
- Starting at age 20 – $93 per month
- Starting at age 30 – $134 per month
The longer you wait to start saving, the more you’ll need to save.
2. Set up automatic savings
This is the easiest way to start, and the best way to guarantee you won’t spend your savings on something else. Make sure you set up a savings plan and have it withdrawn from your account at a frequency that works for you: once a month, on payday, etc.
3. Get familiar with your options, learn the basics.
We all have that friend: she or he tells you about their diversified investment portfolio, the stocks they just invested in and the new house they’re putting a down payment on. It can feel like you’re so far from being that person that you end up saving nothing at all.
Where and how you deposit your savings is up to you and it doesn’t have to be complicated to work.
High-interest savings accounts are simple and will give you an interest rate at about 1.5% to 1.75% on average, compared to 0.15% or less for a regular savings account.
If you’re looking for the highest interest rate possible and don’t need your funds right now, you could consider GICs. You set it up for a certain term, which start at as little as 30 days and you’re guaranteed a rate for that term. This could be a good option if you’re saving up for a specific, smaller, timely goal like purchasing a car a year from now. You’ll get a great rate and won’t be tempted to make a withdrawal early.
If you have an unregistered high-interest savings account or a GIC in an unregistered account, you’ll pay taxes on any interest income you earn. But, if you only invest $5,000 and make $100 in interest annually, it won’t be much of a tax hit.
TFSAs and RRSPs are tax-sheltered savings accounts, which means you won’t be taxed for the your interest income and there are numerous investment options for both (GICs, stocks, bonds, mutual funds, ETFs). A TFSA might be a better place to start if you have a low income and/or you’re just starting to save. You can withdraw from a TFSA without needing to pay any income tax. If you make a withdrawal from your RRSP, you’ll need to pay income tax unless you use the money for the Home Buyers’ Plan or Lifelong Learning Plan.
Once you have a basic understanding of how these deposit accounts work, you can dive into more specific elements of them: tiered or promotional rates, fees and penalties for each, which ones will tax your earned interest and so on.
Don’t be a millennial meme. Get started and get serious about your money.
- Digital Money Trends Report: What We Learned About Saving and Investing
- A Full House-Style Life Lesson (in Personal Finance)
- The Benefits of Automatic Savings Plans
Flickr: American Advisors Group