For men and women in their 20s, financial planners must seem downright motherly. After all, these young people are finally out working and, just as they get set to buy that cool car or neat vacation, along comes some personal financing expert who says 'you should start planning for your retirement.'
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It is kind of like the 'eat your vegetables' chatter you got around the dinner table as a child.
"Start with a cash flow statement, also called a budget — but many people shut down as soon as you say those words," said Brian Emery, a financial planner with the Meridian Credit Union branch in Orangeville, Ont.
Spend a lot…
It may be hard to focus their attention to budgeting, but many newly minted adults would benefit greatly by heeding some simple financial advice.
Younger people in both Canada and the United States tend to spend more than other age groups and save less. A 2009 poll conducted by the Pew Research Centre, a nonpartisan public policy think-tank located in Washington, D.C., discovered that only 27 per cent of Americans aged 18 to 29 described themselves as "savers," versus 37 per cent of U.S. citizens aged 30 to 49.
In the same study, 42 per cent of younger Americans (18 to 29) said they "sometimes" spent more than they could afford. (The Pew poll was conducted between Oct. 18 and Nov. 9, 2009, and consisted of telephone interviews with 2,000 Americans 18 years of age or older. The margin of error is plus or minus 2.5 per cent.)
Unfortunately, the magic of compound interest works best when given lots of time to do its thing. So people who don't save in their early employment years are losing out on a lot of potential investment growth.
Save a little
Even as the demographics dictate that the under-30 cohort will spend its income rather than accumulate financial assets, more and more younger Canadians are becoming financially savvy, at least when it comes to fundamental investments. These days more younger Canadians have RRSPs (42 per cent in 2005 compared to 21 per cent in 1999) and own homes (26 per cent in 2009 versus only eight per cent in 1999), according to Statistics Canada.
It is not so much discouraging younger people from spending their money that's the issue. Rather, it's an inability to distinguish important purchases from incidental buying that causes so much trouble for many, Emery said.
"Separate your expenses into 'need to have' and 'nice to have.' Try bringing your lunch to work instead of eating out everyday. Starbucks versus Tim's? I know what you're thinking, small change, but it's funny how it can add up," he said.
Watching the pennies and building up a nest egg early in life does not have to mean resembling one's Depression-era grandfather and paying cash for everything.
Instead, you can get aggressive by first sinking money into an RRSP and then using up to $20,000 from the RRSP as a downpayment for a new home, suggested Chris Dyer, Manitoba-based regional sales manager for BMO Retail Investments. For couples buying a first home, each person can take up to $20,000 from their RRSP for the down payment.
"If this home purchase qualifies under the first-time home buyers plan, you can take advantage of the tax-deductible contribution, and withdraw their money tax free under the first-time home buyer's plan," he said.
You have to repay the money into RRSP, Meridian's Emery said, but the payback can be done over a period of many years. This results in small, more affordable payments, he said.
Back to the broccoli
Still, Emery is not about to let the young off without a nag or two.
"Try to buy a home that is well within your means. If you are planning on starting a family shortly after the house purchase, be safe" when it comes to how much you spend on the home, he said, since expenses go up once you have children and one spouse may have to cut back on working hours which means bringing home less income.
Fun with stocks
If the young couple wishes to plan more aggressively for the future, one area where they could take on more risk is through the stock market, experts advised.
People in their 20s have more time to wait out a down market than do Canadians in their 50s or those on the cusp of retirement, said Perry Smith, vice-president of Halifax's Waller Group, an affiliate of RBC Securities Inc.
"Ideally, the young investor should invest exclusively in equity at an early age but some may not feel comfortable with that percentage," Smith said.