A Financial Plan For Misguided Millennials

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A Financial Plan For Misguided Millennials

On November 5, 2014, Posted by , In Creating Goals, With No Comments

A Different Approach to Financial Planning!

I have dedicated the past 10 years working with small to medium sized businesses to help them grow. Although I initiate such conversations, rarely do we ever discuss in greater detail an exit strategy or even long-term goals for the business owner’s personal life. Why? The prospect of reaching higher sales in the short-term was always distracting, and it consumed business owners’ thoughts, emotions, resources, and energy.

Somewhat parallel, millennials seldom discuss their future goals, because they have major milestones/obligations in the short term to deal with. Whether it is, saving up for a home (or affording a decent rental accommodation), securing a lucrative career (or even finding stable employment), paying off student loans (or going back to school to get a better education); there never seems to be an ideal time to take a step back and review one’s plans. A few days ago, I posted the image below to showcase the “Traditional Life Plan”. Replicating the baby boomers is actually attainable; however, we will need to re-engineer the approach to living the “good life”.

Looking at the typical path above, the first thing I think of are the unnecessary advertisements running 24/7 from banks giving us the guilt trip into saving up for the next big financial transaction in our life. I would rather have my bank reduce my transaction fees instead of wasting money on annoying TV commercials/banner ads. Most of us know that a dollar today is worth more than a dollar tomorrow. The problem is, more times than not, the media, society, banks, and governments try to put everyone in the same box when it comes to setting the standard for living a normal life.

The roadblocks many millennials face today may come from not knowing all of their current options available, while their current obligations continue to weigh down on them. As well, we are starting to see a fundamental shift in life planning with the baby boomers where two thirds of them would rather continue working instead of retiring permanently at 65 (Reference 2014 Study by Transamerica – an in-depth look at three unique generations READ MORE).

So what does this mean for millennials?

There could be limited entry-level positions, within numerous industries, where employers are retaining their senior employees on a phased retirement basis. It also shifts the timelines that have been previously set by baby boomers with regards to their financial plans. At the moment many baby boomers are shifting their goals from retiring at 65 to ‘Freedom 67′ and even ‘Freedom 70′. Their reasons are not only financial, rather they fear retiring¬†permanently will deteriorate their lifestyle and social life; therefore, employers reap the benefit of keeping skilled labour. Senior employees also reap the benefit of negotiating their work conditions allowing them to be relieved of grunt work, solely focusing on the enjoyable aspects of their job.

This trend has caused many millennials to pursue¬†entrepreneurship; however, being self-employed doesn’t work for most individuals. Therefore, implementing a dynamic financial plan needs to be a top priority. If baby boomers are currently reducing their years of retirement, would it be fair to assume that a millennial is better off spending their youth knocking things off their bucket list instead? How do we create a plan that allows protection in the future, while living a life where dreams are fulfilled before one’s golden years? Lets be honest with ourselves the sales pitch of retirement is not looking too desirable for millennials, even many baby boomers would prefer delaying retirement.

Let’s first start with the general guidelines to create a solid financial plan:

  • Master your cash-flow (create an attainable budget and live by it)
  • Be honest with yourself with your goals in life – set realistic timeframes
  • Don’t give in to the expectations of others, especially if it comes from individuals who don’t practice what they preach
  • Never use emotions when making a life changing financial transaction – know all of the facts before you make the big leap
  • What worked for past generations may not be available for you

We all have to deal with the inevitability that one day our life will end; therefore, it is important to pursue opportunities today, while protecting our livelihood later on in life. So an alternative to the pressures many millennials face today, I have created a unique financial plan that identifies the changing trends of financial planning between generations. Anyone interested in implementing this financial plan should consider speaking with a qualified financial professional (i.e. CFP Financial Adviser, CPA Accountant, etc.) before moving forward.

The following are my assumptions going into this generic plan:

  1. Millennials could prepare for retirement at age 75. Breakthroughs in medicine, could increase the mortality age to the mid 80s range (currently the male mortality age is between age 76 and 79 and the female mortality age is 81). There are financial products that can be purchased after the age of 50 that can lifestyle costs if an individual is incapable of taking care of themselves (Reference: Long-term Care Insurance – LEAEN MORE)
  2. For those who haven’t finished high school yet, they may consider taking a gap year(s) (instead of rushing to college). Unless they know exactly what they want out of post secondary school, and can ensure they won’t be spending the next decade paying off student loans.
  3. Those who are currently servicing their student loan debt, an aggressive repayment plan should be made before taking on more financial obligations (i.e. home ownership, starting a family, etc.).
  4. Forced monthly savings contributions should be implemented immediately. If you currently don’t contribute to savings, start small – start with 5% of your take home pay. Eventually you will want to contribute 10% to 20% of your take home pay, ideally it would be automatically transferred without it causing any setbacks in your discretionary spending. Your savings should be broken down into three buckets – 1) half goes to long-term savings 2) a quarter should be allocated to down payment savings/mortgage pay down 3) life goals (bucket list fund).
  5. Those not able to afford a starter home and/or don’t have the resources, be aware of the savings in housing costs from renting and contribute more towards your down payment.
  6. Start knocking off bucket list items little by little while committing to your savings obligations.
  7. Consider buying your long-term home at age 40. With a 25-year amortization (preferably with a 25% down payment) and establishing an income that can absorb the housing costs effortlessly at that age (total housing costs should not exceed 40% of your monthly take home pay).
  8. If housing costs remain below 50% your take home, continue contributing to your savings plan at the set 10% to 20% monthly.
  9. Well before you purchase a home, establish an emergency fund that covers 6 months of your bare necessities (i.e. housing costs, basic transportation, food, and clothing). The emergency fund should be top priority after your consumer debt is paid off.
  10. Finally, moving forward avoid consumer credit like the plague. If you can’t afford it, don’t gamble your future earnings, especially when you aren’t aware of such future earnings.

Essentially the proposed plan is similar to the traditional financial plan of a baby boomer; however, the plan takes 10 years out of the retirement years to allow a millennial to establish a foundation for their estate. Avoiding contractual financial obligations in the earlier years would give an individual flexibility to explore lucrative career options, establish a foundation for forced savings, and pursue life goals while they still have the energy to do so.

Tomorrow we will illustrate this financial plan to show its merits. Are you currently excited about the prospect of retirement? Or would you consider taking a sabbatical at an age when you can do more things?

We look forward to your feedback.