Preet Banerjee is a Canadian bestselling personal finance author, speaker, and TV host. You can read more from him at the Globe & Mail and on Tangerine! You can also check out his blog: Where Does All My Money Go?
1. Most Millennials can’t afford to support themselves until their 30’s. What’s the biggest thing holding them back from independence?
Fully appreciating that the deck is stacked against this generation with respect to employment prospects (rates and income), debt load, housing prices, and more, there are two main factors. One pertains to the individual, the other pertains to their environment. At the individual level, and this is not unique to Millennials, people are just awful at living within their means. Obviously, “living beyond one’s means” is pretty self-explanatory: it’s when you spend more than you earn. But I think there is confusion with the definition of living within one’s means. I think people are confusing it with living right at their means. Nothing brings you as much financial security as a buffer with your finances, the knowledge that if something goes wrong, you won’t be royally screwed.
Of course, this begs the question: how does one do that? How does one simply live within their means when times are so tough? The answer is equally simple. There is no magic formula. You simply have to face the reality that if your income is low, your expenses have to be lower. If you send out a tweet proclaiming your broke-assness from your new iPhone 6, this would be symptomatic of an internal problem.
Externally, I think we’re seeing the manifestation of too much coddling. I could not believe when I heard a recent story about a teacher being reprimanded (possibly fired) for giving a student a mark of zero for an assignment not handed in. In the real world, if you don’t do your work, you get fired. You don’t call your mommy and complain and get the teacher in hot water. (And shame on the school who disciplined the teacher.) I’ve heard that some house league sports have decided to not take score so that there are no “losers”. I’m okay with every kid getting a citizenship of the week award in kindergarten, but that’s about my limit. Kids need to learn about failure when it has fewer repercussions (like when they are young), as opposed to being unleashed into the real world completely unprepared.
2. The biggest complaint from new grads is crippling student loan debt. What’s the secret to paying it off before gray hairs come in?
Proper budgeting before, during, and after school. I imagine most readers of personal finance blogs are probably passed the first stage, but if you’re in school, you still have to maximize your income and minimize your expenses. If you can start out of the gate with the least possible debt load, all the better. If you’ve graduated, it’s time to set up an action plan to see when that debt will be finally put to rest. Figure out how much of a surplus you can manage and accelerate the loan payments. If you’re not happy with the results, make a change. The theory part of this stuff is not rocket-science, but the execution is tough. I know. I’ve been there.
3. 20-somethings tell me the stock market is scary — what investing tip would you give them to overcome their fears?
There is a trade-off between that fear and the potential returns. If there was no “cost” to a solid rate of return, people would just arbitrarily pick whatever return they wanted and go about their merry way. That “cost” is the rocky ride. I would actually suggest that young investors should be delighted if a market meltdown occurs. If you make money by buying low and selling high, why would you wait for the market to go up before you bought in? If you see a dress on sale for 50% off, do you freak out refuse to buy it? Or do you buy two? That’s how I see the stock market. I don’t buy individual stocks, I buy low cost index funds. I’m buying everything. That’s essentially a bet on capitalism, on entrepreneurship. I’m betting that savvy business people will always eventually find a way to make things work in the long run. Historically, that’s been the case, and there’s no reason to believe otherwise. These entrepreneurs are adaptable. The one think you have to be able to do is tune out the noise. In the short term, things can be very volatile. You could make a great return, or you could lose a lot. Some people describe it as looking at a man playing with a yo-yo while walking up a mountain. If you focus on the yo-yo, it’s always up and down, but take a few steps back and you’ll see he’s slowly making his way up that mountain and near the top, even when the yo-yo is at the bottom of it’s swing (or whatever the hell you call a yo-yo’s path), it’s still way higher than when he started at the bottom of the mountain. Between 1950 and 2010, the single worst 1 year period for a 100% stock index in the U.S. was -37% and the best was +51%. (These are not calendar year returns, these are rolling annual returns. That means the best/worst period might have been from February 1964 to February 1965, for example.) But once you start taking a few steps back, the picture changes. The best 5 year period was +28% and the worst was -2%. Take a few more steps back and the absolute worst 20 year period, the worst, was +6% annualized. (The best 20 year period was +18%). So my advice: read a little history on stock market returns, as well as risk versus return, put money away automatically (when you get paid), and if you can put a little extra in when the market goes to hell to take advantage of the giant sale, you’ll be fine. If you can’t ever get your head around the notion that buying cheaper is better if you have time on your side, then back away from the stock market. You don’t get it.
4. There’s lots of articles about what millennials are doing wrong with their money, but is there anything they are doing right with their money that we’re not giving them enough credit for?
There are lots of millennials who are absolutely doing all the right things. I wouldn’t let all the gloom and doom get everyone down, but that’s what gets eyeballs in the media. It’s survival of the fittest and there are lots of winners. And the “winners” are just executing the basics well. Like I said, it’s not rocket science to understand what you should do, it’s the execution. Some people are naturally predisposed to good money habits. Sometimes it’s because their parents were good teachers, other times it’s because of a traumatizing experience their family had that they never want to have repeated. There are also many who work hard at learning about money, too. There’s a spectrum of those who try to those who try-not. You have to think about where you want to be in that continuum, because it’s going to be a pretty major determinant of how happy you will be over the course of your entire life.