Old sayings for the financially savvy included specific steps like: Save at least 10 percent of your income, save for retirement in a Registered Retirement Savings plan, and don’t spend more than one-third of each pay cheque on housing, yet also do not rent indefinitely, according to a recent article by Fidelity.ca.
While those words of wisdom may have been helpful years ago, experts are now claiming that many of those financial rules are no longer applicable.
“I think the biggest issue is that there was more, maybe, similarity in the experiences of previous generations … (the) housing market was mostly affordable, people graduated with mostly not too much debt, jobs tended to be stable, many of them had pensions,” according to Liz Schieck, a certified financial planner with The New School of Finance.
With the similarities in experiences, there was a greater chance that those kinds of blanket statements would work out well.
Those same rules do not apply to current generations due to a diversity of experiences.
As Schieck pointed-out, all financial advice should be taken with a grain of salt unless the person providing it is completely with your complete money situation.
For example, the RRSP is one of the more common pieces of advice for retirement savings, according to the article.
However, a Tax-Free Savings Account is another option that may be a better fit.
“The federal government introduced the TFSA in 2009 for people 18 and over to save money without receiving a tax deduction or paying tax on money earned in the account through capital gains or other means, according to the article. While there is a yearly limit on deposits and a lifetime contribution limit of $69,500, withdrawals do not incur tax penalties and can prove a better and more flexible option for millennials and Gen Z who might need to access their savings before retirement. Reasons run the gamut, she said, including a home down payment, going back to school for a career change, or even for a vacation.
What can be effective and beneficial is for people to save in a TSFA until they reach a higher tax bracket, she explained.
Since TFSAs have only existed for a little over a decade they remain unused by many people in older generations as a part of their retirement planning, she said.
Thus, the outdated rules need to be reinterpreted.
“I actually think that what most people mean is: start saving for the long term as soon as you can. And that’s great advice,” she said.
With those pearly words of wisdom there are also some other attached sentences hat can be antiquated: to automatically tuck away 10 percent and always fully utilize en employer-matched retirement savings plan.
Janet Gray, a certified financial planner with Money Coaches Canada noted that while the 10 percent is aspirational, it is not always fitting.
There are more budget constraints for these younger generations than the ones before, including higher monthly student loan repayments, bigger housing costs, etc.
She said it is a good idea to find a sum of money to start tucking away regularly in order to develop the habit and prepare for the future, but that can be as small as $25 a month.
In the case of employer match programs it is good to snag the free money when possible, but cautions that there are some people who cannot afford their monthly expenses while they aggressively save for retirement and instead rack up debt.
Accept that it is not always possible to utilize those incentives during different times in life, like when new parents have to pay $2,000 a month for daycare. In such cases, it is acceptable to wait until high-expense years pass and then begin taking advantage of matching programs, according to the article.
Housing is yet another area of life that has been complicated for younger generations. The old adage is to work toward home ownership over renting and never pay more than a third of income on housing, but these are not realistic pals these days, especially in costly big cities.
The 50/30/20 rule is another one that is often cited, according to Schieck:50% on bills, 20% on savings and 30% on wants.
Since so many people struggle to keep necessities under half of their income, especially in cities, The New School of Finance raised the 50 per cent for bills, including housing, to 55 percent when working with its clients.
“Both women advise against buying a house at all costs, especially in expensive cities where a down payment can be tens if not hundreds of thousands of dollars,” according to the article.
It’s a good goal if workable, explained Schieck. If someone can afford to buy a house and pay off their mortgage by retirement and are not house poor, then that will work fine.
“But I would rather somebody rent forever than be house poor,” she noted, and explained that people who take on too much in housing costs often forgo retirement savings or accumulate consumer debt.
As long as people save for retirement, renting can be a sound financial decision, she said.
One piece of advice has stood the test of time: do not spend more than you earn, according to Gray.
Carrying consumer debt is dangerous for financial stability. Build up the rainy day fund so that necessities can be covered if there is any emergency, she said.