The Decibel - Financial dos and don’ts for young adults in an uncertain economy

Episode Date: October 27, 2022

The Bank of Canada announced a 0.5 percentage point rate hike on Wednesday. It’s the sixth consecutive increase in the past year alone. These increases have made borrowing more expensive and saving more difficult for Canadians.With all this economic uncertainty, The Decibel hosted a conversation live on Twitter with three personal finance experts to talk about how young people should prepare to weather this storm. Rob Carrick, Erica Alina and Melissa Leong talk mortgages, savings and their key piece of personal finance advice for young people who may be feeling anxious.You can listen to the full Twitter space conversation here.Questions? Comments? Ideas? E-mail us at [e-mail]

Hi, I'm Maina Karaman-Wilms, and you're listening to The Decibel, from The Globe and Mail. Today we raised the policy interest rate by 50 basis points to 3.75%. This is the sixth consecutive increase since March. That's Bank of Canada Governor Tiff Macklem announcing on Wednesday yet another interest rate hike. These increases have big effects on everything from mortgage rates to personal savings. So we decided to talk to three personal finance experts about what this all means specifically for young people and what they should be doing with their money. We spoke live on Twitter, and today we're bringing you part of that conversation.

This is The Decibel. Hi there, everyone. Welcome to our Globe and Mail Twitter space. Today we're going to be talking about the Bank of Canada interest rate announcement, and specifically, what young people should be thinking about. Joining me today, we've got Rob Carrick, personal finance columnist at The Globe. We've got Erica Alini. She's a personal finance reporter at The Globe. And we've got Melissa Leong, who is a financial expert and speaker. Rob, let me ask you a question here. Should we expect more hikes to come? Tiff Macklem said it is likely. How high could this actually get? Well, I think we're not at the peak yet, but we are probably one or two rate hikes away from it. So if you're wondering how much more pain is to come, I would say we've had 95% of it with possibly 5% more to come.

Okay. Getting a fixed rate mortgage versus a variable rate mortgage, Erica, is one better than the other in this current environment? So the short answer is that they're both bad deals right now. They're both very expensive. Borrowing is the most expensive it's been in years and years. So there are several considerations. So with fixed rates, what you are buying is basically a peace of mind so you don't have to worry about what the Bank of Canada does you're locked in for for the length of the term with variable rates the interest rates adjusts based on a benchmark that's called the prime rate that the banks, the lender sets, but that benchmark is linked to the Bank of Canada's key rate. No one, you know, if you go back in the spring

of this year, no one expected interest rates to rise this much and this quickly. And this has really caught a lot of borrowers off guard. Now, going forward, if we are close to the peak, going with a variable rate end of 2024, you know, then it's very likely that we'll see interest rates come down as well. And so even if it's quite expensive right now, like the rates are in sort of the 5%, 6% range, you got a variable and then maybe you will see a significant reduction in your interest rate during the course of your long term. Rob, I want to turn to you. We have some listener questions talking about housing. So I want to ask

you this question. So somebody sent in, we finally have enough for a down payment for a Toronto house around 1.1 million. So much talk of falling prices to come and rising rates. Should we hold off another six months or so? So Rob, should they wait to buy? You know, it's a tough question to ask because I think we have a tendency to sort of continually underestimate the strength of Toronto housing. So it's going down now, yes, and people are talking about a possible crash. But I take a look at all the immigration that's scheduled to come into the country and the fact that there is this latent demand. And I wonder if the bottom is going to be like a trampoline and we're going to hit it

and then bounce higher. So I wouldn't be too careful about picking the bottom point for housing. I would find a moment now or in the bottom point for housing. I would find a moment now or in the next little while where you think I can afford the house that I want. And if you can't buy, stop trying to time the bottom because you may miss it and end up paying more. Good. That's interesting to hear. Melissa, I'm going to throw this one to you. This is another listener question that we got in. My fixed rate mortgage has two years left. Should I prioritize paying down my principal the next years or invest elsewhere with extra cash? First time homeowner

and manageable monthly payments right now with some surplus to save. So, Melissa, what are your thoughts on that? This is always the age old question for people. Should I invest or should I sort of invest in the market or should I invest in property? And sometimes it's a personal, personal finance is personal. So it's a personal question. You know, what do you feel most comfortable with? My husband has always felt more comfortable with paying down a mortgage because he hates debt and the asset makes him feel more comfortable versus the market, even though historically people who had taken their savings and put it into the market had done better.

But it's hard to say what's going to happen if we're approaching recession time, what's going to happen in the market. That's a hard question to answer. Okay, so personal finance is personal. That's a good line to remember, I guess, too. It's what you want to handle and what you don't want to stress over then. Rob, we have another listener question I'm going to give to you. The question is, how long will it actually take for the rate hikes to affect home prices?

Well, they're already affecting home prices. We're way down from peak levels. And I think we could go down a little bit further. But remember that people want houses in Canada as soon as they get a little bit more affordable, either because prices come down more or because interest rates start to come down a little bit, they're going to jump back in again. So I think we've seen a lot of the effect of high rates on prices already. There could be more, but the question is how much more. Okay. I want to kind of move on to the topic of where to put your money. So especially when times are tight like this, when we see lots of rising inflation, things are costing a lot. Erica, I want to put this question to you because I think people may

be weighing the options of what they could do with their money if they have a little bit of extra money. Could they, you know, put it in savings? Should they pay down their debt? Should they invest it? Of those three options, Erica, what should someone be prioritizing to do first? So I was just thinking, OK, so if I was, say, you know, straight out of school, got my first job, what would be my priorities right now? And so I would say, number one, if I didn't already have an emergency fund, I would start to build a minimal emergency fund. And so at least one month of rent or one month of housing expenses. So mortgage plus property taxes plus

utilities. That's an absolute bare minimum. I would put all of my cash towards that at first. Then I would- So saving essentially then, right? Saving up for an emergency fund then? Saving up for an emergency. Then if I had variable expensive debt with a variable interest rate, so if I had a big balance on a line of credit, or I have to say, if I had a fixed rate mortgage that was coming up for renewal in the next few months, that is a looming payment shock for a lot of people. If you bought your house in the past five years, and you haven't made much of a dent in your principal, and you have a fixed rate,

and your mortgage is coming up for renewal, your payments when at renewal are very likely going to increase and increase significantly. So I would talk to my lender, try to get an idea of exactly what that increase might look like, and start to save up, maybe make a lump sum payment towards the principal, rearrange my finances so that I am ready for that payment shock that's coming down the line. And then and then finally, you know, if I if I still had some resources, I would further boost my emergency fund and try to get to at least three months of living expenses set aside in cash in a high interest savings account. And then finally, if I still had more wiggle room in my budget, I would definitely, you know, save and invest. You know,

the yes, the financial markets are, it's not a pretty picture right now. But remember that, you know, if you start investing in a downturn in a bear market, and you have that much more room for growth. Okay. Rob, I know you've actually written about this before, too. From your perspective, what is what is the gold standard of how much you should be saving? Well, there used to be this idea of saving 10% of your pay. But was that 10% of take-home pay or 10% of gross pay? So if you were saving 10% of gross, that was sort of the silver saver award. But some people say you should be saving more now because there's more uncertainty.

We're living longer, all that sort of thing. But setting these rules out just makes people feel like failures if they can't match up. So I would say start saving with something and build up to it. And if you could save 10% of your take home, then you're doing very well as a first stage. Melissa, what about people who say, you know what, I'm just trying to kind of get by these days. I can only square away a little bit. Is a little bit enough at a time like this? Or would you not bother saving if it can only be a little bit at a time? I really appreciated what Rob just said about these rules of thumb making you feel like a failure. Something that

we often talk about, especially as women and women of color, you sort like a failure. Something that we often talk about, especially as women and women of color, you sort of have these benchmarks and then people tell you, actually, you should be saving more because you may take time away from work to raise children, which will affect your income.

So you should be more aggressively saving. And it's all this pressure. And as you said, right now, there are a lot of drains on a lot of young people, whether that be student debt, whether that be the cost of homes and everything that's happening with rising prices and inflation. And so I do think given all of that, it's easy to feel overwhelmed. But the idea of saving is I cannot stress the importance of it enough, even if it is just a little bit,

even if you can automate a small amount and set a calendar reminder in two months to bump it up, especially if you don't notice it. Any kind of savings for planned spending, any kind of savings for an emergency fund is super important on top of all the things that we talked about, including debt repayment and tackling some of your high interest credit card debt. But just flexing that muscle, no matter what is happening, is something that you will never, never regret. We'll be right back. We've got another listener question here.

I think we'll give this one back to you, Rob. Can we go over some of the major do's and don'ts specifically on savings for young adults just entering the real world during a slowing economy? One of my biggest fears is mismanaging my money and then turning 40 telling myself I wish I had known X during inflation or during this recession. So, Rob, what are some of the key things, I guess, maybe one or two of the major do's or don'ts in this economic environment? Okay, one thing I would say is do take your savings. And that's money you have to keep perfectly safe. And you may need it in the short term. It may be for a longer term. It has to be in a high-rate savings account right now.

You can get between 2% and 3%. I think there's one Ontario credit union that's up at 3.5%. Get a maximum return. There's a don't attached to this. Don't leave your money in a big bank savings account because they're paying next to nothing right now. And think in terms of having your savings that are for emergencies in the short term and then investing for the long term. That's five or 10 plus years. You want to be adding to both buckets. Okay. I want to take a little bit of time to turn to the job market for a moment here, because I think one of the things that may be seen as a positive is that even with the worries of recession, the job market is strong in Canada right

now. Melissa, I want to ask you specifically about women, because you brought this up just a few minutes ago. And especially during the pandemic, we heard about the she session, women being impacted a lot harder in some ways. I wonder, do you have any specific advice for women in today's labor market? You know, so much great stuff has been said about just before moving, adjusting your own emergency funds. So many things are outside of your control. But one thing you can control is how you weather the storm by how much money you have in a stash of cash in an accessible place in a high interest savings account somewhere.

Yes, I know three to six months sounds like a lot, but I cannot tell you how many times my own emergency fund has floated me through so many tumultuous things in my life, including job loss multiple times being in journalism. And so that's one thing I would say for anyone, not just women. I also think that there are other ways to be resilient. Some of those for a young person is also just getting an idea of what other opportunities are going to be available to you at

any time. That could mean, yes, looking at other passions that you are interested in. Maybe there's a side hustle that you can also take on to help you build some extra cash for that emergency fund or something that could float you through a period. Whether you have opportunities from anything. Can you move back in with your parents for a short period of time? Can you Airbnb a property? And anything. Can you move back in with your parents for a short period of time? Can you Airbnb a property? And anything just to give you a possible plan B that will give you a little bit more peace of mind. Yeah. And this actually, this is kind of relates to a listener question that we're

getting here too. The question is, tell me, how can you save anything in this current environment with a family of four? I mean, Melissa, any, I guess, any advice for people who sounds like, you know, are feeling a little overwhelmed in this economic reality? I am from a family of four and my children, they eat giant, giant sized meals. My grocery bill is wild. And so during this time for myself, often when it comes to money, we can get stressed out about it. And when we get stressed, we kind of move away. We bury our heads in the sand. We just plug our ear. You know, it's just sometimes it's easier not to look. But I promise that clarity brings comfort. So if you find that you feel so squeezed, you're not sure where to look. One of the things you can do is look at your own accounts, the inflow and outflow of your money and see where there is any wiggle room if there is if you categorize your expenses by looking

through your bank statements over the last month or two uh and you can see where you can cut discretionary is obviously the easiest place to cut but then also look at your fixed expenses can you make a point of calling all of your service providers at the end of this week i just switched service providers for my mobile phone last week because I'm constantly doing that, always trying to look for a better deal and then allocating those savings directly to something that's important, another priority. And then just getting really innovative with that, looking for help. Are there grants that you can apply for? Is there government money waiting for you somewhere? Can you log into the CRA website and see if there's uncashed checks? You know, there are ways to try to cut and ways to save,

but it does require a little bit more work, a little bit more shopping around, a little bit more downloading of the apps and seeing if you can price compare using something like Flip. It does take time. What app is that, Melissa? Flip is an aggregator, a flyer aggregator. So F-L-I-P-P. It basically pulls in all of the flyers from around your neighborhood according to your postal code. And then that way you can price compare if you're shopping around, if you're looking for things. And you can bring that app into some stores and get instant savings if they do price matching. Okay, good, good tip. I like that. Rob, what about you? Any tips on what to cut back on in this time of high inflation? What would you suggest looking at? Well, you know, one of the

things that's really interesting about the economy right now is as much as we're talking about financial stress, there's a lot of spending going on. A lot of people in restaurants and traveling and doing fun stuff that they couldn't do during the pandemic. And I'm wondering if it's time to sort of us all to sort of curb the celebrating a little bit and try to maybe just ratchet down our lifestyles just a little bit if we've been making up for lost time in the pandemic. You know, sort of that celebratory period was the summer. It's getting turning into winter, maybe that'll be a, maybe that'll be a good opportunity for us to sort of think twice

about the extravagances that we've been allowing ourselves lately. Okay. I know we only have a few minutes left, but I want to get in a few more things here. Erica, I do want to ask you, and then maybe we'll bring this to Rob as well. I want to ask about investing. You mentioned investing, Erica, when we were talking a little bit earlier. But I wonder, if someone does want to start investing, maybe for the very first time, is now the right environment to jump into that? Yeah, that's a question that I just had to tackle earlier this week, someone else asked me and it is a tricky question, because as a as a beginner, it can be gut wrenching to jump in and immediately see your balance shrink. Because you know, stocks are going down, bonds are going down with it. We're in this funny situation right now where we've seen both stocks and bond prices drop, which is extremely rare.

On the other hand, if you are investing for the long term, if you're investing for grasp of investing basics, and you have, you know, a well built portfolio, you know, you're diversified across, you know, companies, industries, countries, then, you know, investing when the market is down is a good time to invest. Rob, what about you here? If someone wants to start investing, what advice would you give them here? Jump right in. Now's the time to get going. You're buying low.

You know what? Long-term investing success depends on participating in the market, putting money in, often on a systematic way. Every time you get paid is a really good way to do it. But you know what? What you put in now, five years from now, will look very good. I'm in no way confident that we're through all the worst of it. But you know what, what you put in now, five years from now will look very good. I'm in no way confident that we're through all the worst of it. There will be backstepping. But as Erica mentioned, stocks are down, bonds are down. You could buy yourself an asset allocation ETF. That's

a fully diversified portfolio in a single package. It's been pretty hard hit this year. I think buying at that reduced level is a really good move for future investing success. Don't avoid investing because, oh, the markets are down. That looks dangerous. That's part and parcel of investing. If you get in when the worst of the downturn has happened, you really position yourself well for the rebound, which will come at some point. Okay. Melissa, I'm going to turn this to you just at the end here. Oh, yes. What's one key thing that you would tell somebody? So somebody who's a young person in this economic time, what should they do with their finances right now, especially if maybe they're feeling a little bit anxious about this economically difficult situation we're in? When I was young, I felt like I was just so behind.

I had so many expenses. I didn't make enough money and my draw prospects didn't seem promising. But the one thing that I tried to do that has changed my life time and time again, that has helped me weather so many storms, is I did automate a small amount of my savings for the future. And to Rob's point, I automated them for two things. One of them was for a rainy day so that I could build up that fun. And the other one was for a more long-term thing. At first, I thought it was buying a home, but it turned out to be my retirement fund, which years later, I look back at these two things that didn't take that much time and it wasn't a lot of money. It was just a little bit at that time and I just

kept bumping it up. Those two things have changed my life. Okay. Erica, what about you? What's the one key thing that you would tell somebody right now? One thing that I would point out is that the job market is still pretty strong right now. And so if you're really feeling like you've looked everywhere in your budget, and you have nowhere else to cut, and you're still feeling squeezed, this is one of those times where I would say, see if you can maybe bump up your income by taking up a side gig. I'm not a huge proponent of having two jobs in perpetuity. I think that's a sign that you need to find a better paying job. But for short term goals, such as really building up your emergency fund

quickly, then a side gig can really help you. Yeah. Rob, throw to you here last, what is the one key thing that you would you would tell someone? You know what, I think we've had a lot of good suggestions. So what I'm going to add to the list is don't beat yourself up if you're not where you think you should be. You know, young people today are going to live extra long lifespans are going to be working in the workforce quite a bit longer than previous generations. There is a lot of time to get your finances straight, to get into the housing market, to get your investments straight, to build up retirement assets. Take it slow. Take some positive steps. Start with savings. Start with a little investing. But don't lose your motivation

if you think, I'm not where I want to be, why would I even continue to do anything? You know what? That's a good positive note to end on there. Thank you. Thank you, Rob. We'll wrap up our conversation here. Thank you so much to our three guests. We had Melissa Leong, financial expert and speaker, Erica Alini, personal finance reporter

here at The Globe, and Rob Carrick, our personal finance columnist. That's it for today. I'm Mainika Raman-Wilms. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Kasia Mihailovic is our senior producer and Angela Pachenza is our executive editor. Thanks so much for listening and I'll talk to you tomorrow.