Each generation faces unique challenges and opportunities in the ever-evolving world of personal finance. For Generation X and Millennials, navigating the complexities of financial management amidst economic shifts, technological advancements, and changing societal norms can be particularly daunting.
In this blog, I write about the five most common mistakes I see these generations make and how you can avoid them.
1. Mistaking Gambling for Investing
If you're doing any combination of day trading, buying cryptocurrencies or speculative stocks, you're gambling, not investing.
It's easy to get drawn in by the temptation of quick riches, and while there will always be exceptions, most of these don't work out.
Buying diversified strategies like index funds isn't exciting, but you can get rich doing it. It just won't happen overnight.
2. Being Over Reliant Real Estate
Particularly, in Toronto, there was nearly a decade of a massive runup in real estate.
As real estate prices kept rising, young people started to get anxious that they would never be able to afford a home, and had to get it in at any cost or would be left out.
The hot real estate market also had the effect of making people think that it was an easy way to get rich.
This has caused a few problems. As people are learning, real estate is not a guaranteed road to riches and doesn't always increase in value.
Younger generations don't remember this, but during the late '80s and mid-'90s there was a large downturn in Ontario real estate. Inflation-adjusted home prices dropped by 38% in the GTA.
It will surprise most, but real estate has underperformed Canadian stocks
Now, many younger Canadians are in a position where they're real estate poor.
They own property, but, after mortgage payments, have little, if anything, left to invest in other assets.
This leads to a situation where they're incredibly concentrated in one asset class in one part of the world.
3. Not Having Proper Insurance
Most people in their 20s, 30s and 40s have three main needs for insurance.
The first is to protect your biggest asset. Most people likely think their largest asset is their real estate or stock portfolio. But for most young people, it's your ability to earn an income over the rest of your career. This needs to be protected with proper disability insurance.
Next is critical illness insurance. It's not fun to think about, but cancer, strokes, and heart attacks are more common for young people than you'd think. Critical illness insurance can provide crucial cash to help you and your family through traumatic illnesses.
Lastly, if you have a combination of debt (like a mortgage) or dependent children/spouse, you must protect them with term life insurance.
Not Having A Plan
Doing the right things when young can pay massive dividends and open so much freedom.
I've met with too many people who waited until their mid 50's or even early 60's to do any serious financial planning, and their options were severely limited by that point.
Whether it's having to work longer than they want or accepting a lower standard of living in retirement, these could've been avoided if they'd started earlier.
Lifestyle Creep
As younger people progress in their careers and make more money, it's the natural inclination to raise their standard of living instead of increasing their savings rate.
Enjoying your life in the moment is important, but there's a balance between saving for your future.
Whether it's the vacations, cars, or expensive clothes, everything you consume today detracts from your future lifestyle.
*The views and opinions expressed in this article may not necessarily reflect those of IPC Securities Corporation