Our Views

A young adult’s guide to smart spending

We recently held the spring session of our popular NextWave program, an educational and networking based initiative that helps the next generation of our client families become more informed, confident and financially independent.

On an evening in May, a group of young adults in their 20s and 30s gathered in our boardroom to discuss ‘how to spend money wisely’. Although this topic might seem somewhat prosaic, it attracted close to 40 ‘millennials’ and inspired a spirited discussion. The following concepts were discussed as a guide for young adults to make smart spending decisions and more effectively build and manage wealth.

Live a comfortable life, not a wasteful one. Many ‘Gen Y’ individuals have never experienced real financial hardship. The downside of this is that it can sometimes lead to overconfidence and overspending, rather than saving for ‘rainy days’ or to achieve financial independence.

Taking steps to reduce expenses and build savings was not a new concept to most but served as a reminder that financial independence requires time and discipline. Studies indicate that high-net-worth individuals spend twice the amount of time planning and organizing their finances as others. Participants received a copy of our NextWave Spending Plan to help them capture, prioritize and monitor their expenses.

Ignore the Joneses. Society and popular media does a good job convincing us that success is measured by material things. By contrast, the popular book, The Millionaire Next Door, (and our experience) suggests that many millionaires and high-net-worth individuals do not fall into the trap of society’s materialistic pursuits and, in fact, live very modest lifestyles. This book reveals that an astounding 95% of millionaires surveyed in America had never spent more than $300 for a pair of shoes; in fact for every millionaire that has spent $300 there are eight non-millionaires that have spent an equal amount or more on shoes. When discussing similar statistics for suits and watches, reality set in for many of the young adults in our group as they realized that they may be spending more on material items than high-net-worth millionaires!

Some of the take-away lessons for this group were that it is important to be conscious of buying decisions; to purchase based on quality rather than brand name; not be afraid to buy used rather than new big ticket depreciable assets (e.g., cars, etc.), and shop around for sale items.

Focus on what’s important. Setting financial goals and working toward achieving those milestones was another key message. Short-term goals will vary by individual and may include paying off student debt or purchasing a home. Longer-term goals should include achieving financial independence; the freedom to choose how you spend your time and money without relying on your next paycheque. We opted for the term “financial independence”’ as an alternative to “retirement” and found that our group was much more open to the concept, believing that financial independence could be achieved at any age — compared to ‘retirement’, which to a young adult sounds unattainable.

To achieve financial independence in the long run, it is important to start now, establish sound financial habits early in life to generate savings and enjoy the benefits of compounding.

We all agreed spending wisely is not ‘rocket science’; the tough part is just doing it. But hopefully by having an opportunity to openly share their successes and challenges in managing their finances with their peers, these young adults walked away with new ways to think about money, some new tools and the encouragement to take control of their spending.

NextWave is Newport Private Wealth’s initiative to help adult children of our clients to better manage their finances.