Mistakes in our youth are normal and forgivable, but financial ones can be nasty to fix.
Young consumers are still missing the basics, experts say. Budgeting, saving, planning for emergencies, using credit cards correctly – advisers are seeing young clients who struggle to grasp the fundamental principles.
It seems Canadians in general aren’t in touch with this reality. A recent RBC poll found 75 per cent of respondents said they have good financial habits, and 62 per cent even rated themselves “above average” compared with friends and family. But when asked about those actual habits, more than a third admitted they did not monitor expenses or set financial goals.
Barbara Knoblach sees the results of ignoring expenses and not having goals.
The financial planner with Money Coaches Canada had one client in their mid-20s who seemingly had his life on track – finished school, well-paying job, relatively new car, living on his own. But his finances were a mess. His credit card was nearly maxed out at $20,000 and he struggled to make rent.
Then, a disaster: he was at-fault in a collision, totalled his vehicle, but needed a car for his job. His family bailed him out because he had no savings and no credit left.
“The experience was a wake-up call that he needed to change his financial behaviour,” Knoblach said.
This client’s credit card statement was “routinely spanning several pages” with many small purchases, mostly for food, she said. He had no idea how much it added up every month.
Knoblach corrected his course: watching expenses, taking cooking classes, making his own meals, paying down his credit card balance, starting to save.
But his case epitomized the top three mistakes she sees with young consumers – ignoring their spending, especially with smaller, frequent purchases; accumulating debt; and forgetting to save, which means a financial setback can be crippling.
“Not keeping track of finances can be likened to driving in winter with an iced-over windshield – you don’t know where you’re headed,” Knoblach said.
“Starting to save early has numerous benefits, the most important being the ability to consistently live below one’s means.”
Kate Childerhose sees similar situations as a financial adviser with Edward Jones. She remembers one piece of advice she took from her entrepreneurial father: “No one is ever going to take care of you like you.”
Young people aren’t saving, she said, they’re forgetting to put money aside for themselves.
Her retiring clients are now facing the consequences from choices in their youth in their twilight years, Childerhose said – after putting all their money into a house and not saving for retirement, they’re actually going to lose the house. These clients don’t even have enough cash to carry basic costs such as property taxes and utilities.
“You need to prioritize your debt, but you also need to take a little bit of that money every month and start some savings for yourself,” Childerhose said. “You need to do both.”
Even with massive student loans from advanced degrees and doctorates, young people still need to pay themselves. Relying on credit cards to fill gaps means they’re dealing with crushing interest.
“When they take all their available cash and pay the debt off, that’s when the credit card accidents happen, because we don’t have a plan B, we have nothing to fall back on,” Childerhose said.
Young consumers should not carry credit card balances from month to month, she said – they should make purchases within their budget and pay it off promptly.
“I’ve sat down with young couples and I started asking questions about debt, and they’ve got three or four credit cards, and they’re carrying balances on all of them,” she added. “And the (interest) rate, I’ve seen anywhere from 15 to 30 per cent, depending on the card. Like, that’s never going to get paid off, right?”
An unsecured line of credit would be a better option than a credit card for emergencies when you don’t have enough savings built up because the interest rates are lower, Childerhose said.
As for solutions, there are free or affordable resources everywhere, Knoblach said, including books, library courses, non-profit credit counselling services and budgeting workshops. Financial planners and coaches can provide tailored advice.
Young consumers are in a growth phase, she pointed out, which can be costly. And peer pressure to maintain a lifestyle may encourage poor financial habits.
“Young people tend to work in entry-level positions with limited discretionary income, yet they may take on substantial debt, such as student loans or car loans, to build their lives,” Knoblach said.
“Surrounding yourself with individuals who manage their money wisely can help improve your own financial habits over time. As the saying goes, `Birds of a feather flock together.”'
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