Much has been said about the state of the economy in the wake of the COVID-19 pandemic. While the world is trying to get back on its feet, economists are saying that the disruption may be hitting Millennials hardest, causing disruptions in the job market and stalling potential moves up the seniority ladder.1 That could be a double-whammy for some after the 2008 recession interrupted the flight path of many Millennials just starting out. Sandra Bussey, a High Net Worth Planner with TD Wealth, says that these kinds of economic issues may result not only in economic instability for the individual but a lack of optimism and disillusionment.
It’s why she says Millennials can benefit from having a clear road map for getting through this bump in the road.
“Whether it’s a change of attitude or just seeing the glass half-full, Millennials have to accept the economic conditions for what they are,” Bussey says. Some may be losing faith that hard work and smarts can move you toward your goals anymore – that’s the wrong view to take, she says.
Bussey says while there are challenges, Millennials have many qualities other generations lacked: They are more careful with their money and are more socially and environmentally conscious. She says their goals have less to do with buying homes and accumulating wealth than exploring the world and having a positive impact on it.2
If anyone is mired in pessimism from the news headlines, Bussey offers these ideas on how they can manage through these troubled waters.
Accept the new reality
If you haven’t already realized that you may face a tougher time than your parents, time for some cold water in the face: Times have changed, the economic situation is different and avoiding those truths can make you unhappy and the situation worse. Much of the news sounds dire, but don’t get bogged down by it, Bussey says. Tough times are an opportunity to develop fortitude, character, and resilience. These are traits the free-spending previous generations may have lost touch with. Try not to compare yourself to where your parents or grandparents were at your age: Wishing you were further down the road in life can make you despondent, but coming up with a plan — and maybe a guiding life philosophy — can sustain you along your journey.
Embrace a frugal lifestyle
Millennials may be less consumer driven than previous generations and more motivated to accumulate experiences than “stuff.”3 This could be a different attitude or it may be driven by necessity, but it’s a wise perspective to have in this day. With money short, every penny (and what you do with it) will count, Bussey says. Saving money can help you move toward basic financial goals like a car, a vacation and a home. That means smart decisions on how much you are spending in every aspect of your life. It could also mean making a budget and paring down the money you spend to absolute necessities if it means you can reach your goals quicker. You may decide to use public transport (if possible) instead of owning a car and you may want to cook at home most nights rather than grabbing food where you can.
Saving $10 and $20 here and there may not seem like you are making any progress — especially compared with the instant gratification you get when you spend on lattes and shoes — but over time, those funds can multiply. How much you should save and what to do with your savings takes some preparation and that calls for budgeting and planning. As mentioned, you want to save as much as you can but be realistic in your planning: Don’t allot your tax refund to your saving account if you will actually end up splurging it. Instead, think about an emergency fund that could help see you through if there is a gap in your pay. Next step is making your savings accumulate through investments, either through TFSAs for shorter-term goals or through RRSPs for retirement. One of the biggest advantages Millennials have is the years ahead they have to let their investments grow, Bussey says. Consider your risk tolerance together with your time horizon since, if you are saving for age 65, growth investments may be suited for the long haul. You may also want to be active in determining which companies and industries align with your values. Finally, remember sometimes it’s not how much you make but how much you get to keep: Make sure whatever plan you have is a tax efficient one.
Keep upgrading your skills
Getting yourself educated and making yourself as marketable as possible for jobs is good advice at the best of times but if the world slips into a prolonged recession, it’s a basic survival consideration. Millennials are tech-savvy and it is those skills that are both likely to be in demand and are apt to get rusty if they are not renewed. Fortunately, there is a wealth of information online on most topics and much of it is free. In a time when high-paying jobs may be scarce and competition for them is tough, improving yourself — and demonstrating that effort to improve — looks great on a resume, Bussey says. A broad repertoire of skills can do wonders for your confidence in any interview situation. Also consider volunteering if you need to put your new knowledge into practice.
Getting a job out of school and retiring from that job 35 years later, as your parents did, has become increasingly rare. You may find more opportunities working in the gig economy as a consultant, freelancing or having to make a major career change at some point. You may try relocating once or twice to find the work you want. But perhaps one of the worst things to do is to let opportunities slip by because you think you should be headed in another direction. Everyone should know that life isn’t perfect or even fair, but you can make it harder on yourself by insisting there is only one path for you to walk down, says Bussey. It may sound corny but every situation that arises is a valuable experience.
HIGH NET WORTH PLANNER, TD WEALTH
ASSOCIATE VICE PRESIDENT REAL ESTATE SECURED LENDING, TD BANK
A: These are unprecedented times. Hard-working, conscientious people could find themselves sick, temporarily unemployed or just unable to work. And if that happens, many Canadian homeowners may wonder just how they’re going to pay the bills, the biggest of which for some may be their mortgage payments. Canada’s banks, the federal government and the Canada Mortgage and Housing Corporation are stepping in with relief in the form of a six-month mortgage deferral program.
Here are the details: The program is being administered on a case-by-case basis to individuals whose mortgages are in good standing, and will be available until at least June 30, 2020. The relief offer is a pause on the payments themselves, not a forgiveness of the overall mortgage obligation, which means that interest will continue to accumulate and be added to your debt. In some cases the interest will be compounded. There may also be options available to pause your mortgage credit protection insurance premiums. You should reach out to your financial provider for details, though TD clients can find information about applying for this and other relief offers online here.
Individuals considering this option should give it careful thought: think about how it will impact their own situation and recall that the program is designed to alleviate temporary hardship due to the impact of COVID-19. Depending on the current position of your finances, it may be better to continue with your mortgage payments. If you think your unemployment or debt situation could be longer term, you might wish to discuss other options that may be available.
In order to determine whether the deferral program is for you, calculate whether you could continue to make payments. Consider your current spending and make a sharp distinction between what is discretionary and what isn’t, what you have to pay for and what you can get by without. Look at all your debts from your mortgage to your credit card bills and make sure you are prioritizing your debt properly. Cash saved by not paying a mortgage could, for instance, go towards paying down credit cards, even just the minimum.
Check your cash flow and see what you are expecting to receive in the near future. Also, look at what other bills are being deferred during this period, such as property taxes. You may also be eligible for other COVID-19 government relief programs.
If you really are in a predicament because of the COVID-19 crisis where the disruption of cash flow is preventing you from making a mortgage payment, a deferral might be your best route.
When things do get “back to normal,” remember that the amount owing on your mortgage will be higher, due to the interest that has accrued. In that case, you might wonder how you will “catch up.” In the case of TD, your payments will be adjusted automatically at the start of your next term, to ensure your mortgage is paid off at the end of your original amortization period. You can speak with your financial provider to see what other options may be available, including the potential for a lump sum payment or increasing your payments to help you get back on track sooner.
To sum up, getting relief during this period of uncertainty is welcome but juggling finances can be tricky even at the best of times. If you think a deferral of payments may be right for you, you can find out more about TD’s relief offers here, or reach out to your mortgage provider to discuss the options available.
You probably try to be a money-conscious shopper. Maybe you check prices, do your research, try your best to catch a good deal when you can. But at the end of the month, do you still wonder where it all goes? Even with the best intentions, any one of us might pore over our monthly transactions and be surprised to see exactly where we spend our money, from coffees and lunches to big ticket splurges.
You’d love to up your savings rate, but where will the money come from?
Good news: You don’t have to blame your willpower or your paycheque for cash-flow woes. It could be your brain that is sabotaging you. There are many tricks our brains can play on us to keep us spending and make it hard to find a nice cushion to put away for future goals, like retirement. Behavioural economists, the experts who study the psychology of how we make financial decisions, have termed these blind spots “biases,” the word for an illogical assumption that encourages us to behave a certain way.
“It comes from a good place,” says Kristen Duke, assistant professor at Behavioural Economics in Action at Rotman, at the University of Toronto. “Your brain is wired to reduce the energy required to make everyday decisions, so you may use mental shortcuts, or ‘heuristics’ — a method of problem-solving that’s not always optimal or rational. Problems can arise when you rely overly on those mental heuristics and are not mindful enough about what you are doing, or in this case, what you are spending.”
What’s more, what may seem like chump-change to you could be pretty substantial down the line. Consider that if you are able to cut your spending by $27 a day, in a year it would add up to $10,000. “Even saving a modest $100 a month at age 35 could inject almost $70,000 into your Registered Retirement Savings Plan (RRSP) by the time you are 65,” says Sandra Bussey, a High Net Worth Planner with TD Wealth. Packing a lunch and bringing coffee from home can help, but the decisions you make on big ticket items can make a big dent in your overall budget, too.
Here are four scenerios where our behavioural blind spots may cause us to spend more than we intend to, as well as some thoughts on how you might kick your brain into gear and outsmart them.
Opportunity Cost Neglect
After attending a party at a colleague’s beautiful home, you start to feel like maybe your own home could use some updating. You estimate that a renovation might cost upwards of $50,000. What do you do?
- Head to the bank to see if you can extend your home equity line of credit to fund the reno.
- Consider that $50,000 in an RRSP or TFSA could turn into $100,000 in 20 years.
- Call the contractor. You’ll figure it all out later.
According to Duke, Opportunity Cost Neglect refers to our failure to consider alternative uses for our money, particularly ones that may have more obvious potential for gains. “People often don’t think about what alternatives they have if they aren’t right in front of them,” she says. “While you ultimately may decide that your house needs a renovation, and the imminent increase in your home’s value might trump the savings contribution and return down the road, you can at least ask yourself what else this money could buy you.”
It’s time to buy a new car, and you’ve decided to go with this year’s model of Brand X SUV. The dealer offers you the choice of three trims: a no-frills basic model, a slightly more expensive package with shiny alloy wheels and enhanced GPS capabilities, and a top-of-the-line option that comes with a bigger engine, leather seats, and an in-car satellite entertainment system. What do you do?
- Pick the middle package. It just feels like the right balance of cost and luxury.
- Weigh the options carefully and assess the extra costs associated with each luxury upgrade.
- Pick the most expensive option. You couldn’t be seen in anything less!
Behavioural economists use Compromise Effect to describe our tendency to choose the middle option when presented with a selection of levels or sizes. As Duke puts it, “the middle trim of the new SUV can seem like a safe choice: You don’t have to sacrifice too much on money or on features, and you don’t have to feel guilty for choosing the extreme or supersized option.” In the case of a car purchase, the dealer may even be banking on this tendency to upsell you from a basic model. But if you take some time to assess your options and do a cost-benefit analysis, the money you save could grow in an RRSP or TFSA if you are able to come in under your car budget.
As you work with the builder on your new house, you are presented with some options for upgrades. In the showroom, you look at flooring, crown moldings and granite countertops. Next to the standard finishes, they look so much nicer! What do you do?
- Go for the upgrades. After seeing them next to the standard finishes, you could never live with the lesser option.
- Take home some samples. You can weigh your options independently over the course of a few days.
- Stick with the standard finishes. If you hate them, you can replace them later.
Distinction Bias refers to the tendency to over-value small differences when comparing options. “Comparing two things side-by-side often highlights small differences that don’t really matter,” says Duke. “In the case of the upgrades on your house, it might be better to take some time to weigh each upgrade option independently of each other. Ask yourself questions like, ‘What will add value to your home down the road? What will add better function in your home?’ And of course, ‘What suits your taste?'” Upgrades can add tens of thousands to the total cost of a new home, money that may be saved for other goals.
It’s been a brutal winter and you want to book a sunny getaway. The last time you went away was over five years ago and you paid about $1,500 for the trip to Barbados. This time you are thinking Mexico. What do you do?
- Research prices on the internet to discover what a week in Mexico might cost.
- Budget $1,500 for the week, since that’s what you paid last time.
- Book the cheapest trip you can find to anywhere around the equator.
Believe it or not, your mind is generally anchored to a price, and you are willing to pay it, even if the value of an item is much less. “When you are making a purchasing decision, your brain may focus on the first information you think of, or encounter, and your later decisions are made as adjustments based on that original anchor,” says Duke. “The problem arises when that initial piece of information doesn’t accurately reflect the actual value of the item.” In the case of a vacation, you might assume the cost of the last trip you took is a reasonable starting point when the actual fair price for a trip to Mexico, at this time of year and five years later, could be much different. It may be a good idea to research the value and going price of your purchases before you set a budget or decide what you are willing to pay.
What will you do with all the money you find?
If you start to recognize your mental heuristics when it comes to spending and begin to be more mindful of how you make purchasing decisions, big and small, you may find there’s more money left over at the end of the month. It could have an impact on your overall cash flow and even free up more money for savings.
“Finding some extra money and using automatic deposits to contribute monthly to an RSP is a low-maintenance way to help you reach your retirement goals,” says Bussey. In fact, making your contributions automatic are a great way to help your brain create a good “default” that will help to build your net worth down the road.