It’s the root of all evil (or so they say). It makes the world go round (or so they say). And it can’t buy happiness (or so they say).
Yes, we are talking about money. If you’re not thinking about it, you should probably start. Money, and how much you have, is important whether we like it or not.
The Millennial Generation (a.k.a. Generation Y) need to complete a personal finance assessment, and sooner rather than later. Are you a millennial? Do you have your finger on the pulse of your finances?
Not sure if this applies to you? Defining the Millennial Generation is imprecise at best, with birth years ranging from as far back as 1976, and as recently as 2005 (depending on who you ask). Most sources, though, define millennials as those born between the mid-1980s and the early 2000s. Data from the Pew Research Center says that 50% of them are politically unaffiliated, 29% of them are religiously unaffiliated, and they number roughly 80 million in the United States alone. Millennials are growing up and coming of age in a digital, mobile world, and they are well positioned to take advantage of that. That’s the good news. The bad news? They’ll be dealing with the fallout from the Great Recession of 2007 for years to come.
But it’s not all doom and gloom. Or it shouldn’t be at any rate. Millennials, like all generations, just need to ask themselves a few questions.
1. Should I Start Saving Now?
The short answer? Yes. The long answer? Yes. No matter what your level of financial understanding, one thing that everyone should grasp is that the longer you save (i.e. the sooner you start putting money away for retirement), the more you’ll have at the end. And that’s not even considering things like returns on investments. It’s just simple math. If you put $5 in a savings account every month starting when you’re 15 years old until you retire at 65, you’ll have socked away $3000 (again, just looking at straight numbers here). Wait until you’re 35 and that number drops to $1800. That’s a big dip.
Throw compound interest into the mix, and the years you wait will come back to haunt you like Freddy Kreuger. The longer your money grows, the more interest you accumulate, which adds to your total sum, which gains more interest. Repeat for 40+ years and it makes a huge difference. How much of a difference? Consider this:
Let’s say you start putting $1200 per year (only $100/month) away with a return on savings of 7% (a realistic return is around 7-8%...you might see higher, you might see lower, but over time it’s a safe and reliable figure). If you start when you are 20 years old and do it every year until you turn 65, you’ll have contributed $54,000. But the effect of that 7% compounded interest over those 45 years will actually give you a sum of $366,902!
Now, let’s say you wait until 35 to start with the same annual amount and 7% return. At 65 you’ll have set aside $36,000, and the compound interest will make it $121,288. Less than half the final amount.
And, of course, you’ll likely increase the annual amount you contribute over time as your salary goes up, too. Compound interest can provide you with hundreds of thousands of additional dollars when given enough time. Start early. Start today. See for yourself with the compound interest calculator.
Can you afford to start putting away just $100 per month right now? Can you afford not to?
2. Should I Buy Property?
It depends! Where do you live?
According to a recent White House study, home ownership amongst millennials is down. In fact, they are less likely to own a home than any previous generation. The number of 18-35-year-olds living with their parents increased from 28% in 2007 to 31% in 2014. Home ownership just doesn’t seem to be a priority.
Does that mean you shouldn’t be looking? Again, that depends. Property value and prices are rising steadily in most of the world, so the longer you wait, the more you’ll end up paying (in theory at least). Do you have the means to pull the trigger now? You’ll typically need 20% of the purchase price as a down payment, so you might want to look at your options.
If you don’t have the 20%, but still want to jump into the housing market, don’t fret. You can. Anything less than 20% as a down payment, and you’ll be required to purchase mortgage insurance (anywhere from 0.32% to as high as 3.6% of the purchase price).
But that isn’t necessarily as bad thing. You could wait a few years while you save money for the down payment (and run the risk of property prices soaring out of your reach), or you could get the insurance and buy today. Over time, and in some markets (see It’s Time for Many Canadians to Abandon the 20% Down-Payment Rule), you actually end up saving money that way.
In other markets, renting is the way to go. RealtyTrac collected data on 285 counties in the United States and found that it made more economic sense to rent in 34% of them (including Orange County in California, the District of Columbia, and San Francisco County).
So the answer to the question is do your homework. It might be time to buy, and it might not.
3. What's My "Latte Factor"?
Do you know where your money goes each month? If you’re like most people, you probably have a general sense of how you divide your paycheck, but it’s time to be precise. If you’ve ever felt like the money disappears too quickly with nothing to show for it, you need to identify your latte factor.
Coined by David Bach, the author of the Finish Rich series of books, your latte factor is the tiny but frequent expenses that give you nothing beyond a quick fix of caffeine, nicotine, gossip, or whatever. It includes buying daily lattes at Starbucks (hence the name), cigarettes, glossy magazines, or lunches. A few dollars here, a few more there, and it adds up over a month or year. The amounts are small, so we don’t really notice them at the time.
You can try Bach’s Latte Factor calculator to see how much you’re basically throwing away. Spending $3 per day on a coffee, for example, adds up to $1160 over a year, or $6542.97 (the calculator automatically adds the interest that money would have accumulated had you invested rather than spent it) over five years.
The power of compound interest means your daily coffee habit could be costing you tens or hundreds of thousands of dollars over your working life. Find it, reduce or eliminate it, and start saving the money. Know where your money is going so you can direct it and make it work for you.
4. Should I Go to College?
Probably. The millennials have that entrepreneurial spirit, no doubt, but they also have more college degrees than any other generation before them. According to the Council of Economic Advisors, They’re also more likely to attend graduate school (increased from 2.8% in 1995 to 3.8% in 2000). Furthermore, the “college premium” increased to 70% (up from 60%) in 2013, meaning that college degree holders see a 70% increase in median earnings over high school diploma holders. And the unemployment rate for bachelor degree holders at was 3% in 2014, compared to 5% for high school grads. So is college still worthwhile? You betcha!
You could drop out - or not apply in the first place - and try your hand at creating the next big app, service, or social media platform (millennials are super tech-savvy, after all). But while you do that, the majority of your millennial brothers and sisters will be attending college and university. Advantage? Them.
5. Do I Understand Personal Finance?
Most of us have a rudimentary grasp, if at all. It’s not usually taught in school (it should be), and you’ll only encounter it in post-secondary studies if you choose a field that requires it. The general public doesn’t really have a good understanding. Credit, compound interest, fixed-rate mortgage, prime lending rate...it might as well be ancient Greek.
Do yourself a favour and ask this question right now. If you can answer “yes,” then good for you. If not, start educating yourself today. You’ll have an advantage over most people, and financial peace of mind. You’ll appreciate what needs to be done to secure your financial future.
Do something. Anything. Educate yourself. It’s your money...you need to understand it.
Money doesn’t have to be evil, scary, or the reason you can’t sleep at night. Ask a few questions, do a little work, and reap the rewards.
Did we miss anything? What’s the most important money question you asked yourself? Leave your thoughts in the comments below.