Dear Generation X: Here’s How To Fix Your Finances

The number of financial responsibilities facing Generation X – those ages 37 to 52 today – seems overwhelming. Getting married, having kids, and raising a family can be expensive enough. Now factor in building an emergency fund, paying down the mortgage, setting aside money for retirement, saving for your child’s education, and everything else that comes along with improving your finances. It’s a tall order – I’ve been there! In fact, I’m living it.

But let’s skip the scaremongering and over-generalizations and get to some common sense advice.

How do you balance paying off debt, saving, and investing with the everyday costs of supporting a family? Let’s start by setting up a simple plan for each of these categories to ensure that you are on the right financial path. Here’s how to fix Generation X finances:

Treat Consumer Debt Like A Financial Sin

You can’t move the needle forward financially if you’re constantly spending more than you earn. But when your mortgage payment, car payment(s), daycare costs, groceries, and gas take up your entire available budget then you have no wiggle room to plan for unexpected costs.

Not only that, when the “I deserve this” moments come up and you want to treat yourself or your family to dinner, a movie night, or a vacation you end up going into debt (just this one time) to make ends meet.

Start with a list of everything you currently spend over a period of three months. Where does all your money go? Find a way to slash expenses so that you’re no longer going into debt just to get through the month.

Make it a rule: No New Debt This Year.

Now it’s time to tackle your current debt, whether that’s in the form of a lingering line of credit or (gasp!) a high interest credit card. If it’s the latter, put all savings and extra spending on hold and throw every extra dollar at that debt until it’s paid off.

A line of credit might require longer-term planning to pay off. It’s not a five-alarm fire, but if you’re using it as an ATM you need to stop now and make a plan to pay it down.

Try the debt avalanche or snowball method.

Streamline Your Mortgage

Those at the tail end of Gen X entered the housing market at the peak of the real estate boom with long amortization periods and little-to-no down payments.

Here are two quick fixes to help pay off your mortgage balance faster and save on interest.

The first is to switch your payments from monthly to bi-weekly. On a $300,000 mortgage at 5% interest amortized over 30 years, switching to bi-weekly payments costs just $133 more each month and saves thousands of dollars and more than five years off the life of the mortgage.

The second tip to help streamline your mortgage for the future is to switch to a variable interest rate, but maintain your payments at the fixed interest rate. Using this strategy while interest rates still remain relatively low will further reduce the principal on your mortgage while still giving you a cushion in case interest rates rise further.

Use Your TFSA for Short Term Savings

A Tax Free Savings Account allows you to contribute up to $5,500 per year and withdraw from the account anytime without paying any taxes on your gains. For someone in his or her 40s with many competing short-term financial priorities, the TFSA is the perfect savings vehicle.

As a couple, make it a priority to contribute and fully fund at least one of your TFSA accounts each year. Create a list of short-term goals that need to be addressed in the next 1 – 3 years and use your TFSA stash to pay in cash.

Your list might include anything from buying a new car, to doing some minor renovations or repairs in the house, taking a family vacation or upgrading your furniture. You don’t want to go into debt for something you could have easily planned for a year or two in advance.

Contribute to an RESP

An RESP (Registered Education Savings Plan) is a great way to begin saving for your child’s education. The two mistakes I see many new parents make:

1. Trying to maximize their RESP contributions before they get their own finances under control.
2. Failing to open an RESP in the first place.

After your child is born, make sure you get the account open and take advantage of any initial grant money. Simply contribute what you can afford in the beginning.

Use some of the money you receive from the Canada Child Benefit to start contributing to an RESP. Start with as little as $25 a month and increase the contributions as your budget allows.

Once you can comfortably afford it, bump your RESP contributions up to $2,500 per year. That will get you the maximum annual government grant (CESG) of $500.

Don’t Put Off Saving For Retirement

With so many competing financial priorities it’s easy to see why Generation X might put retirement savings on the back burner. But the fact is you must save for your future to secure a decent quality of life in retirement.

The good news is that you’ll have plenty of time to get your retirement on track once your short-to-medium term finances are in order.

Setting up an RRSP is simple and with low cost index funds like TD E-Series you can start contributing small frequent amounts to help build your retirement fund. Like with RESPs, start with what you can afford and then slowly increase the amount until you are contributing at least 10% of your income.

One thing to make sure you take full advantage of is an employer-matching savings program. Some employers match your RRSP contributions dollar-for dollar up to a certain percentage of your salary. Calculate that amount and make sure you can contribute at least that much to get the full match from your employer.

You can’t beat free money, or a 100% return on your investment.

Finally, I can’t stress enough that you need to make savings automatic. That means set up a pre-authorized withdrawal to come out of your chequing account on payday and go straight into your RRSP. You’re paying yourself first rather than trying to scrape together whatever’s left over at the end of the month.

Final thoughts

There are so many financial pressures facing Generation X today that it’s no wonder why the media and so-called experts question what the future holds for this generation.

Buying and paying off a home, maximizing every savings vehicle, and retiring by 55 are probably out of reach for most of us without making major sacrifices for the next decade (or more).

Of course Gen X is feeling the squeeze, but it doesn’t mean this generation is screwed.

The key to handling money at any age is to strike the right balance – where every aspect of your finances can be set-up for small, continuous, measurable improvements.

If you can do this, while taking care of everything else that comes with raising a young family, you can help dispel the rumours of our doomed financial future.