September 10, 2021 | By: Anna Guglielmi

Millennials & Debt: Dealing with the Millennial Wealth Gap

Debt Management | Millennials

There seems to be a lot of misunderstandings about Millennials in popular media outlets. If you run a search for “Millennials” in Google or some other search engine, you’ll probably see a few articles about how they’re killing some long-standing industry, are unmotivated compared to previous generations, or promoting some other stereotype that only serves to generalize an entire generation of diverse and unique people.

Many of these articles treat Millennials as nothing more than ignorant youngsters who aren’t prepared for responsibility—a stereotype that is decidedly untrue. Millennials, or “Generation Y,” have birth years ranging from 1980 to 1994. So, the oldest Millennials are already in their 40s while the youngest are in their late 20s.

One sad, but true, statistic about this generation is that they are, on average, holding more debt than their forebears. According to a Statistics Canada resource, in 1999, young Gen-Xers had a 125% debt-to-after-tax income ratio, while Millennials in 2016 had a 216% debt-to-after-tax income ratio. So, Millennials and debt go together like peanut butter and jelly.

Additionally, the Millennial wealth gap between the bottom and top 25% of this generation is greater than it was for Generation X. As noted in the Statistics Canada resource, “Millennials in the top 10% held 55% of all total net worth accumulated by their generation.”

They also noted that the gap between the poorest Millennials and the richest in 2016 was $9,500 and $253,000 in average net worth. Meanwhile, the net worth gap between the top and bottom 25% of Gen Xers in 1999 was $6,200 vs $126,900. Note that Statistics Canada did adjust these numbers for inflation to make a fairer comparison.

The Main Causes of Millennial Debt

So, why is the average Millennial debt to income ratio (after taxes) 216% when it was only 125% for the previous generation? There are a few factors that contribute to current Millennial debt statistics:

1. The Increasing Cost of Higher Education

A higher education has long been advertised as the solution to increasing earning potential. However, the cost of that education has increased significantly compared to what it was for earlier generations.

For example, Forbes Wealth Blog noted that studies “found that tuition fees had tripled on average from 1993-94 to 2015-16.” Meanwhile, Knowledge First Financial stated that the average four year program with residence in 2018 would cost $85,454, while a program without residence would cost $45,654—and projected that these costs would rise to $101,785 and $55,385 by 2026.

This rise in education costs vastly outpaces the average rate of inflation in Canada—which has ranged from highs of 5.63% in 1991 to lows of 0.17% in 1994 and 0.3% in 2009. The average inflation rate in Canada from 1991 to 2020 would be about 1.9% a year (when rounded up to the nearest tenth).

Considering that Knowledge First Financial reports that “Almost 6 in 10 (57%) of adults in Canada aged 25 to 65 have completed college or university,” the increased cost of an education may help explain why younger Canadians carry more debt.

Student loan debt in Canada is a major contributing factor to the overall amount of Millennial debt. However, this is far from being the only factor that contributes to Millennial debt.

2. The Increasing Cost of Home Ownership

According to advisor.ca, “46% of millennials who do own a home say they received financial assistance from their parents. Even so, this younger generation takes an average of 13 years to save for a 20% down payment, while a Canadian Mortgage and Housing Corp. report said their [grand]parents took only five years as of 1976.”

Millennial mortgage debt is a major contributing factor to the higher number of Millennials in debt compared to previous generations. The Toronto Star reported that “the average price in 1971 for a house was just $30,426 — or a mere $190,388 in 2014 dollars. By comparison, the average price in 2014 for a house in the GTA was $566,696.” So, even when adjusting for inflation, the average cost to purchase a home has more than doubled over the last five decades.

So, for any Millennial who wants to own their home instead of renting it from a landlord, the cost to make that purchase is much higher than it would have been for their parents at the same age. Even the cost of renting is putting the hurt on Canadian Millennials’ wallets.

According to Rentals.ca, the average rent for all Canadian properties listed on their site in July 2021 was $1,752 per month. Considering that the average annual income for Canadians is about $49,000 (Source: Statistics Canada), this would be almost half the average person’s monthly income.

3. The Millennial Wealth Gap

One of the problems when discussing Millennials and debt is that, if all you look at is averages, you may end up ignoring the extreme wealth gap that has grown between the richest and poorest members of society.

As noted by Statistics Canada, “the top 10% of millennials held about 55% of the total net worth accumulated by all millennials.” With the rich getting richer and the poor getting poorer, it is often difficult for those on the lower end to catch up.

Trying to find ways to live cheaper may also hurt earnings potential. According to CBC.ca, “millennials are often told it makes financial sense to move to smaller cities with cheaper real estate, but Moorhouse notes those cities also generally come with much lower salaries and worse job markets, which negates some of those theoretical benefits.”

Because of the Millennial wealth gap, some members of the generation may not be facing any financial hardships whatsoever while others are struggling to pay their bills each month.

4. Millennial Credit Card Debt

Did you know that there are approximately 76.2 million Visa and MasterCard credit cards in circulation in Canada? That’s about two credit cards per person in Canada. According to Greedyrates, the “average credit card debt in 2019 in Canada was about $4,240” and about “70% of Canadians pay their credit card balance in full each month.”

Even with many people paying off their credit card balances in full every month, Millennial credit card debt can still accumulate shockingly fast due to a variety of circumstances.

For example, if someone gets laid off from work (such as what happened to many people because of COVID-19), misses a bill because of distractions, gets severely injured, or goes through some major life change, then it can be extremely easy to suddenly rack up a huge credit card bill.

Being able to pay off credit card debt or find reliable consumer credit counselling is important for minimizing the risk of debt growing out of control.

Money Tips for Millennials

Now that we’ve discussed some Millennial debt statistics and a few potential causes of Millennial debt, let’s discuss some basic money tips for Millennials that can help them at different life stages.

From here on, we’re talking to Millennials:

1. Plan Your Finances with Your Spouse/Significant Other

Whether you’re married, plan to get married, or are avoiding marriage entirely but are living with your significant other, it’s important to conduct your financial planning with them. This means:

  • Discussing your financial goals;
  • Looking at your combined assets and liabilities;
  • Talking about your credit histories;
  • Discussing whether you should have joint bank accounts or separate accounts; and
  • If getting married, talk about the wedding budget and expectations.

For example, do you want a traditional wedding in a big church with a huge wedding cake and expansive guest list? That will likely be extremely expensive—between $22,000 and $30,000 on average according to Money Sense. It may make more financial sense to hold a “micro” wedding with a limited guest list or even to just have a quiet civil ceremony.

You could repurpose the money saved to put down 20% on a home, pay for a really great honeymoon, or just save it for a rainy day/emergency expense.

2. Pay Off Debt as You Save for Other Financial Goals

If you’re wondering how to be debt free, a great place to start is by paying off debts if you can—even while you save to achieve your financial goals. This can be difficult when money is tight, but it can be done.

When paying off debt, it’s important to settle on a specific debt repayment strategy—such as the snowball method or avalanche method.

In the snowball method, you begin by focusing on the debts that have the smallest balances first while paying the minimums on all other debts. Then, when the smallest balance has been paid in full, the money that went towards it is put to the next lowest balance. You then repeat this process until all of the debt is paid off.

In the avalanche method, you focus on the debt that has the highest balance or interest rates first while paying the minimums on everything else. Then, once that balance is paid off, you put the money that was going to it to the next biggest balance.

The advantage of the avalanche method is that you will end up paying less in interest. However, the snowball method provides more immediate satisfaction and makes it easier to stay motivated.

3. Use Tax-Advantaged Retirement Plans

Saving for retirement is important. Saving the right way is even more important. Leverage tax-advantaged retirement funds and plans such as a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA).

While they aren’t exactly exciting, RRSPs and TFSAs are a much more reliable and impactful way of saving for retirement than relying on the lottery retirement plan—where the odds of hitting a jackpot or other major prize range from 1 in 4.7 million to 1 in 33.3 million depending on the game (Source: Ontario Lottery and Gaming Commission).

RRSPs, unlike lotto tickets, are tax-deductible—meaning that the contributions you make to an RRSP account won’t be counted towards your earnings for tax purposes (though the income will be taxed when you finally claim it). Meanwhile, TFSAs are not tax-deductible at the time of contribution—but they won’t be taxed when you withdraw money from them.

Both options are far more reliable than buying lotto tickets, making them better for your retirement prep.

4. Make a Monthly Budget

One of the first steps in any plan to get (or stay) out of debt is to create a monthly budget. This might sound tough for some, but it might be easier than you think! The basic steps are relatively simple:

  1. Create a List of Your Expenses and Income Sources. Before setting a budget, it’s important to know what your current expenses are vs your income. If you’re spending more than you’re earning, then it might be time to find ways to cut back!
  2. Track and Sort Expenses by Type. Once you have your list of expenses, it’s important to sort them by type. This helps you differentiate between necessary expenses, such as housing and utilities, and unnecessary expenses, such as eating out or gaming.
  3. Set Realistic Financial Goals. After getting a good idea of how much spare room you have in your budget, set a realistic goal for yourself—something like buying a home in a few years, getting out of debt, or saving up for a car.
  4. Make Budget Priorities. Want to meet your financial goals? Be sure to set some priorities for your budget. Take a long hard look at your expenses and find out which items you could cut back on or do without for a while.
  5. Set Up a Savings Account. If you have some spare room in your budget, consider setting aside some money in a savings account. RRSPs and TFSAs are a great place to start, but something as simple as opening a basic savings account at your bank (that you can easily take money from in case of a rainy day or emergency) can work, too (though RRSPs and TFSAs generally get better interest than most bank savings accounts).

Need Help Getting Rid of Millennial Credit Card Debt?

If you’re looking for Ontario debt assistance, Credit Canada is here to help! Whether you’re a Millennial in debt or part of another generation, our certified Credit Counsellors are standing by to provide supportive, non-judgmental assistance.

Reach out to us at 1.800.267.2272 for more information now!

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