In Canada, Millennials, those aged 15 to 35, make up about 9.5 million people, representing around 27% of the population. This group has recently become the largest part of the workforce and will likely inherit significant wealth in the coming years. Given the personal and professional changes and increased financial independence typical in these years, it’s crucial to focus on practical financial management skills and overall financial literacy. This guide provides strategies in six key areas to help Millennials gain confidence and knowledge in managing their finances.
1. Setting Short- and Long-Term Financial Goals
Setting financial goals can feel overwhelming, especially for Millennials who have many immediate needs like education, marriage, buying a home, or starting a family. However, defining both short- and long-term financial goals is crucial for creating concrete plans. Research shows that writing down goals improves the likelihood of achieving them due to increased accountability, better progress tracking, and motivation. Clearly defining and recording goals provides direction for effective planning.
2. Establishing a Savings Plan
No matter your goals, developing a savings plan is essential. One effective method is to regularly set aside a specific amount through a pre-authorized contribution plan. This plan automatically transfers a portion of your paycheck into a savings account or investment vehicle. A good starting point is to save 3-10% of your paycheck. As your income grows, revisit and adjust the amount saved. This approach ensures consistent progress towards your goals by making saving automatic and reducing the temptation to spend impulsively.
3. Creating and Sticking to a Spending Plan
Beyond budgeting, creating a realistic spending plan is vital. Various online tools and apps can help with budgeting, but they can’t make spending decisions for you. A spending plan helps you make mindful financial choices by aligning with your short- and long-term goals. It acts as a reminder of your objectives and helps develop accountability in your spending habits. RBC offers useful online tools and calculators for creating spending plans.
4. Understanding Debt and Deciding Between Paying Down Debt and Investing
Not all debt is the same, and understanding the differences is important. High-interest debt, like credit card debt, should be paid off first. Some debts, like certain student loans, have tax-deductible interest and may not need to be paid off immediately. When deciding between paying off debt and investing, consider the after-tax return on investments versus the after-tax cost of debt. Consulting a qualified tax advisor can help you make the best decisions for your circumstances.
5. Learning About Investment Options
Understanding different investment options is crucial for effective savings. Two main registered accounts to consider are Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs). TFSAs offer tax-free growth and flexible contributions and withdrawals, making them suitable for both short- and long-term goals. RRSPs are less flexible but offer tax deductibility and can be used for the Home Buyers’ Plan and the Lifelong Learning Program. If you’ve maxed out contributions to these accounts, consider non-registered investment options, keeping in mind the tax implications. Consulting a qualified advisor can help you choose the best investment options.
6. Enhancing Financial Literacy
Building financial literacy is key to making confident financial decisions. Research shows a direct link between financial literacy and financial confidence. Millennials should prioritize financial education, which can come from formal programs, online resources, and family discussions. The Canadian Financial Literacy Database is a useful tool for finding information and resources on various financial topics. A qualified advisor can also be a valuable resource in improving your financial literacy skills.
By focusing on these six key areas, Millennials can develop strong financial management skills and make informed decisions to secure their financial future.
