From an early age, learning the basics of money smarts can go a long way in positively setting the stage for informed and proactive financial decision-making. As individuals advance through their youth, these skills take on a heightened level of importance as responsibilities and exposure increase. This holds especially true for those who are currently attending or have recently graduated from post-secondary institutions, as this is a time when many individuals typically experience a major shift into greater financial independence. When you consider that over one million young adults are attending universities across Canada in the 2016–2017 academic year, and 300,000 will graduate and enter the workforce in 2017,1 it’s clear how crucial financial management skills are among this demographic and into early adulthood. Add to that the fact that today’s young adults will be the main receivers of what’s being labelled the largest wealth transfer in history over the coming decades, and financial literacy takes on an immense level of importance during this period of change.
Today’s young adults—a financial snapshot
For individuals and families who have reached a life stage where they’re beginning to think about and plan for transferring wealth to their children and/or grandchildren, there may be an element of concern among some in doing so. The source of these worries is generally rooted in two things: not knowing if their younger family members possess the financial responsibility needed to manage the funds in appropriate ways, and whether passing wealth down in this way will encourage a sense of entitlement among the younger generation and discourage their motivation to actively build their own financial resources.
While personal situation and an individual’s habits and level of responsibility should always play a key role in determining readiness, some statistics indicate that many young adults these days are prioritizing financial planning and do share many of the same goals as their parents’ generation. For example, according to a recent poll of young Canadians, 49 percent want to own a home and 48 percent want to make reducing or eliminating debt through regular payments a priority.2 At the same time, however, the younger generation seems to be struggling to balance short-term and long-term saving.3 Part of this challenge among today’s youth arises from the fact that the economic and social landscape is different than it has been in generations past. The job market is tougher with more part-time, temporary and contract employment; both tuition and housing costs have substantially increased and continue to rise; and divorce is more common, which has created more complicated family situations — it’s factors such as these that make financial planning increasingly complex for youth. But while there are a number of competing priorities and aspects to consider, what it comes down to is helping young adults bridge the gap between identifying what their goals are and should be and putting appropriate plans in place to attain them in today’s social and economic climate.
Financial literacy at community and institutional levels
In recent years, the promotion of financial literacy has come to the forefront across the country, focusing on Canadians of all ages, and specifically youth and younger generations. It was 2011 when the Financial Literacy Action Group (a coalition of non-profit organizations that raises awareness and highlights programs and services to help Canadians improve their financial knowledge and skills) organized the first Financial Literacy Month, which takes place every November.4 In the first year, there were 200 events and that number expanded to 1,266 workshops, seminars and events in 2014, taking place in every province and territory in Canada.5 And since that time, the number of initiatives has continued to grow.
Outside of the recognized month of November, there are a range of initiatives and organizations devoted to supporting financial literacy and the development of strong financial management skills. The Financial Consumer Agency of Canada has centralized much of this information through its Canadian Financial Literacy Database, which provides a comprehensive and expansive tool to help individuals search for resources, information and events on a wide range of financial topics from various Canadian organizations. The database also zeroes in on specific demographics, including students, youth and young adults and also provides links to over 125 different financial education providers that support the National Strategy for Financial Literacy, Count me in, Canada.6
Building financial skills during the post-secondary years
For Canadian youth, finances and work are often main stressors in thinking about the future. In a recent poll, it was found that among Canadians aged 18 to 24, 63 percent have been negatively impacted by the cost of post-secondary education, 59 percent are struggling with the cost of housing in their community, 50 percent feel negative about the availability of good-paying jobs in their field, and 53 percent are challenged by the amount of debt they have.7 It’s important to recognize, however, that for some, these concerns may stem from a lack of financial knowledge and understanding of how to strategize in order to offset or plan for these potential challenges. Among this age group, the following outlines some important areas of focus.
6 key tips for post-secondary students and recent grads
- Build and use monthly budgets. Establishing your budget should involve tracking all of your day-to-day expenses, as well as your school costs from housing to groceries to transportation to textbooks. From there, it’s important to be conservative with how expenses add up in relation to income, and then make adjustments as needed.
- Understand credit and credit score. A credit card can be a valuable tool, but it can also be a source of great financial stress if not used appropriately. Do research to find out about fees, limits and interest rates, and how spending and payment behaviour impacts your credit rating.
- Recognize some important things to look for in a first-time job, beyond salary. Many employers offer a range of programs and initiatives to help promote a positive work culture, employee engagement and retention, and to support their employees in saving for the future. When applying for or accepting a new position of employment, some key financial aspects to understand are the benefits package and terms, whether the company offers a pension plan and which type it is (a defined benefit plan or a defined contribution plan); if there’s an employer-sponsored group RRSP plan, or if they reimburse professional development courses or association memberships that will help you advance in your role and career.
- Focus on saving. Incorporating it into your budget is an effective way to generate and grow your savings. A good starting point is to direct three to 10 percent of your paycheque to a savings program. Part and parcel of this should also be understanding the difference between an RRSP and a TFSA and the potential benefits of each.
- Develop a process for managing your bills and accounts. Even in a highly digital age when you can arrange for automatic payments and many accounts exist online, it’s important to keep track and check these regularly.
- Know and make the most of available tax-planning strategies and credits for students. A useful checklist can be found in the Spring 2016 edition of Perspectives.
Addressing the full financial picture in early adulthood
Many in this demographic will agree that this stage typically brings with it a number of life and financial changes, often including marriage, home ownership, starting a career, and having kids. Understandably then, this can also mark a point in life where planning becomes more complex given these growing factors to account for. And while 2014 statistics indicated that 50 percent of young adults were contributing to an RRSP (which was the highest level in five years)8—a promising indication that there’s heightened awareness as to the importance of long-term saving at this stage—that still means half of young Canadians may be uninformed about the benefits of RRSPs or are potentially prioritizing other more immediate goals. Within this demographic, the following outlines some key areas of focus to develop a balance between planning for the here and now versus the future.
5 main considerations for 20-somethings
- Identifying short- and long-term goals. A simple approach is to think about and itemize objectives at five-year, 10-year and 20-year intervals, for example. Noting them concretely can be a great starting point for conversations with a professional advisor to then put the right planning and investment strategies in place.
- Having a suitable emergency fund. As a rule of thumb, for an individual this should be roughly three times your monthly expenses, and for a couple or those with kids, it should be six times your monthly expenses.
- Developing a basic knowledge of both registered and non-registered investment options and the purposes of each type. Part of this should include an understanding of the tax-sheltering advantages associated with registered programs, and the potential benefits of non-registered accounts for shorter-term goals. Again here, the knowledge and assistance of a professional advisor can be very useful in this regard to cater solutions to your particular circumstances.
- Being disciplined in paying down any debt and eliminating debt with the highest interest rates first. It’s also important to understand the importance of making payments on time and paying more than the minimum amount, if possible, in relation to credit rating.
- Rethinking spending as part of your overall budget. This may include items such as buying lunch every day, coffee and transportation choices. Even small adjustments in areas such as these can add up over the course of the year, and may equate to savings that could be directed to an RRSP or TFSA, for example.
Among the range of resources, news and articles that cover the topic of financial literacy among the younger generation, it’s evident there are a variety of views and opinions as to how informed late teens and young adults are in regards to financial management and planning, as well as their readiness to effectively take on financial independence. But regardless of what school of thought you belong to, the key point to recognize is that developing these types of skills is becoming — and needs to remain — a priority. It’s about ensuring our youth have access to appropriate and timely resources and that relevant learning opportunities and tools are embedded throughout various aspects of their lives, whether that’s schooling, community programs, family mentoring or organizational initiatives.
For additional information on important aspects to consider at a variety of life stages, please view the RBC Wealth Management Canada Special Report, “Five key questions to consider in wealth planning”.
In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.