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Gone are the days when the term millennial meant teens and twenty-somethings struggling to get entry-level jobs or unpaid internships. Today, the oldest in their generation have turned 40, and the youngest are already 25. They now make up the generation that’s starting families and buying homes, and they make up the largest demographic in the workforce.
But as this generation approaches its prime earning years, the long-term consequences of the millennial wage gap are becoming clearer than ever. Every generation faces its economic challenges. Millennial money problems often have their root in higher debt and lower incomes than what previous generations had at the same age, as well as fewer avenues for wealth accumulation, such as entering the property market.
What Is the Millennial Wage Gap?
Millennials are higher-educated and more in debt, usually due to student loans, than any generation that came before them. However, by some estimates they earn 20% less than baby boomers did at the same age. The median income for their age group is lower than it was in the 1980s, adjusted for inflation, despite a rise in both education and in productivity.
Lower wages, higher debt, and higher housing costs have stood in the way of millennials’ efforts to build their wealth. Delayed homeownership is a good example of the long-term implications of the wage gap. Among millennials, 46% believe that homeownership is a pipedream, despite 72% also saying that homeownership is a personal goal. Meanwhile, another 46% of millennial homeowners received financial help from their parents in order to purchase their property. The effect: homeownership often isn’t on the table for those without wealthy parents.
The millennial wage gap is just one part of the story; the other side is how that’s created an even bigger wealth gap between the two generations and between the haves and have-nots in the same age group.
Common Millennial Money Problems
Not only do millennials face lower wages than previous generations at the same age, but they’re also dealing with considerably higher living expenses. The debt professionals at David Sklar & Associates work with people struggling with debt every day. They see how people wind up digging themselves into debt and help them find the best way to get out of it. These are some of the most common millennial money problems we see.
#1 Student Loans
Student loan debt is at all-time highs, and it can turn into a major obstacle for young people trying to make progress in their financial lives. Carrying a student loan balance can stand in the way of buying a house, starting a family, and saving for retirement.
It’s also difficult to file bankruptcy on student loans because you have to wait 7 years from the last day you were a full- or part-time student to include them in bankruptcy. The same applies to student loan debt and consumer proposals, making it one of the hardest debts to get out of when you don’t have the money to pay.
#2 Little to No Savings
The good news is that according to the Ontario Securities Commission, 4 in 5 millennials have savings and set aside part of their paycheques. However, that means 20% of them aren’t saving, and this is where people can wind up running into insolvency. If you don’t have an emergency fund, a sudden expense or period of unemployment can force you into debt.
#3 No Retirement Plan
While the majority of millennials are saving, the same Ontario Securities Commission report also found that only 1 in 2 are investing. Many are worried that by investing, they’ll wind up losing money, which could well be the aftermath of coming of age during and after the Great Recession. The S&P 500 didn’t recover its 2008 losses until 2013, during which period markets were extremely volatile and uncertain.
In addition to their fear of losing money, many are also focused on saving for other goals, including homeownership and paying off student debts.
#4 Low Credit Scores
A low credit score can lead to rejection for mortgages, car loans, lines of credit, and even credit cards. Although there were signs that their credit scores were improving before the pandemic, millennial credit scores still lagged behind other generations. Furthermore, the loss of income for many that came with the pandemic has been a setback for many.
What Millennial Money Mistakes Do People Often Make?
The problems above are often the result of low wages, high cost of living, and unavoidable financial decisions like student loans. These are problems that may be out of your individual control, though there may be steps you can take to improve things. However, there are also a number of millennial money mistakes we see that can wind up causing unnecessary financial hardship.
#1 Consolidating Student Loans
A common mistake people make is signing up for student loan debt consolidation. People are often desperate to get out of their student loans, and it can lead them to make poor financial decisions. While it may feel like they’re hanging over your head, in Canada, student loans tend to have lower interest rates than many other types of debt, and there are relief programs if you’re struggling to pay it back.
When you consolidate student loans, the interest payments are no longer tax-deductible, and you can no longer benefit from interest relief options available in Canada.
#2 Payday Loans
Payday loans are startlingly common among Millennials. Roughly one-third have used payday loans, an alternative type of loan that comes with extremely high interest rates, though they are often marketed to seem more affordable than they really are.
Payday loans can quickly turn into a cycle where you’re borrowing with every paycheque and paying a substantial fee that adds up rapidly. Because interest is charged on such short cycles, it can be the equivalent of 500 to 600% APR.
If you get stuck on the payday loan cycle, you may have to file for bankruptcy to get out. However, insolvency is not the end of the world, and filing bankruptcy when you are young can help you start over.
#3 Too Much Mortgage Debt
The astronomical rise in housing costs has first-time homebuyers – most of whom are millennials – taking on ever-higher mortgage loans with smaller down payments. While the recommended down payment has historically been 20%, the average down payment is now around 8.8%. That means first-time homebuyers are saddling themselves with huge amounts of debt. Although interest rates are also historically low, they can and likely will go higher, putting today’s borrowers in a tough position down the road.
As long as home prices continue to rise, mortgage debt can help you build equity, but only if you’re able to keep up. High mortgage payments can make it harder to keep up with other expenses, especially if there are changes to your household income.
#4 Borrowing for a Wedding
Your wedding is a big day, and in Canada, it tends to happen in your late 20s or early 30s. Wedding costs can surge to truly surprising amounts. Couples in 2018 spent on average over $30,000 for their weddings.
Borrowing in order to pay for a wedding means you’re starting your new life with your partner with shared debt already hanging over your heads. Life is only going to become more expensive if your goals including buying a home and starting a family. Wedding debt can force you to put those goals on hold or could contribute to bigger money problems down the road.
Managing Millennial Finances When You Have Debt
When you’re younger, getting out of debt and starting to save is one of the best financial goals you can set for yourself. But the millennial wage gap can make that feel like an impossible goal because there’s only so much money you can earn. It’s frustrating to know that you have a lower income and higher debt than your parents and past generations had. But there may still be a way out of debt.
Although there tends to be a stigma about bankruptcy, there are some good reasons why millennials should consider filing for bankruptcy when they’re young.
To begin with, they’re more likely to own fewer assets that would have to be sold in bankruptcy. Assets that typically have to be sold and included in a bankruptcy estate include second vehicles and properties, home equity above $10,000, non-RRSP investments, and others.
Millennials are also farther away from their retirement and often not yet at their peak career earnings. This means they have more time and opportunity to bounce back from a bankruptcy, restore their credit history, and start saving for retirement. The later in life that you file bankruptcy, the more disruptive it can be to your retirement plans. If you’re struggling to save for later in life because of overwhelming debt, you may be better off getting discharged from that debt than taking years to pay it all back.
If you are feeling overwhelmed with debt, talk to a Licensed Insolvency Trustee about your options. They will consider your income, expenses, debt, and your financial goals to find the right debt solution.