As a Gen Xer I grew up in an era that saw the personal computer become a household item, the advent of ATMs and the first forays into creating the brick mobile phone. It is probably an understatement when I say being tech savvy was not my sweet spot. While that was fairly easy to get on top of, especially after I had children who seemed to pop out of the womb fully tech literate, having never been exposed to Personal finance 101, getting financially savvy was a whole new ball game.
Financial services was to a large extent created for the Baby Boomer generation, the wealthiest generation in history. It has been said that this post war generation born between 1945 and 1965 not only benefited from benign economic conditions but also had the combination of rising house prices and decreases in the real value of mortgages as a result of high inflation. Some of this generation enjoyed free university education, jobs for life and final salary pensions. It is therefore not surprising that financial services was pretty much tailored to who it served and as it served a largely male client base at the time, the picture of who it was targeted at becomes even clearer.
Step into now and we have a new dominant generation. The Millenials. Poised to be the largest adult segment by the end of the decade and expected to grow their wealth significantly in the next couple of years. Wealth managers who now have close to 70% of their current clients over the age of 60 have found a new target to focus their attention on and that is this new mega sized generation entering their wealth earning years. This generation is super turned on to technology. Financial services have jumped onto this and as a result have focused a significant amount of effort on their online offerings.
What happened to the Gen Xers ? We seem to have fallen through the cracks of financial advice and even more impactfully, financial education. Don’t get me wrong, I am not overlooking the Gen Xers who have done phenomenally well despite this; think Elon Musk, the two founders of google; Larry Page and Sergey Brin, Sara Blakely and Cindy Eckert, the first women to sell her business for a$1 billion, to name just a handful.
However outside of the successful few a significant percentage of us Gen Xers did get left behind. We stumbled around the personal finance playground and tried to figure out how the toys worked. We now find ourselves being labelled as the spending generation and commonly we have the debt to match. Late to preparing for the retirement party and being less cash flush than the other generations given a high percentage of us are home owners with large mortgages, and having the unique challenge of providing for and caring for our children and our ageing parents, we are not an obvious target for the financial service providers.
All is not lost however if we commit to taking urgent corrective action right now.
Set a retirement goal
Every great journey should start with a goal. Knowing where you want your life journey to take you is an important aspect of getting to your destination. There is a simple back of the envelope formula to calculate the nest egg you need to build for your retirement. Estimate your likely annual expenses in retirement and multiply this by 25. This is a rough guide to your retirement target.
What does this formula mean ? It is loosely estimated that the assets you invest in to get you to your retirement amount can reasonably provide a real annual return of 4%. This means after it has been adjusted for inflation. The 4% your assets are earning equals the annual amount you have just figured out you will need in retirement, and if you are able to live on this you should not need to deplete your nest egg.
To check this let’s assume you want to live on £25,000 per year. £25,000 multiplied by 25 is £625,000. And £625,000 multiplied by 4% is £25,000.
Get real about debt and laser focused on eliminating it
The biggest hurdle standing between you and financial success is debt. This is the debt outside of a mortgage, which should carry a reasonably low rate of interest. I am talking about consumer debt such as credit cards and other personal credit. This debt carries a high interest rate and is basically strangling your ability to build wealth.
Identify the debt with the highest interest rate and direct any spare cash you have to eliminating it. Remember to keep paying the minimum balance on your other debt.
Audit your cashflows to identify leakages
Track your cashflows to identify any expenses you can reduce or eliminate comfortably. This is not about cutting all the joy from your life. This is about identifying the expenses that don’t serve and add value to you.
Be very clear on your purpose when you do this audit, this is all about creating a financially secure life for yourself now and in the future. Unnecessary outflows prevent you from doing this.
Want free money? Maximise tax efficient
In most countries this is a pension plan. If you are employed, see if your employer contributes to your pension. If they do, match what they are putting in and where you are still able to, within tax constraints, contribute up to the tax constraint. What I mean by a tax constraint is the limit the tax man has put on annual contributions before tax kicks in on them.
If you are not employed establish a personal pension plan and contribute as much as you can up to the tax free limit.
If you have maxed out the contributions to your pension, start investing through other tax efficient vehicles, such as an ISA in the UK. You can currently invest up to £20,000 per year through an ISA.
Get adequate and insurance in place
A huge risk to your financial security is the loss of the full capacity of your best asset, You and your ability to generate income. Insurance is your contingency plan and provides the extra safety net should you suffer any type of disability or dread disease. A solid financial plan considers all eventualities that can derail your financial security, this is one of the items in your plan that you quite literally cannot not to have.
If you have dependents who are reliant on you being around a Life policy is another must have.
Insurance may feel like one of those joyless expenses you should be eliminating rather than contemplating adding on. Don’t look at is as an expense, consider it a personal safety net for some of life’s challenges.
Get realistic about who you can support and make sure you are securing your future financial security
GenXers are a generation of jugglers. We have a tendency to want to support as many of our loved ones as we possibly can. This is not a bad approach to life, however in doing this we need to keep front of our mind that when it comes to our finances, self care comes first. I read a wonderful viewpoint on this somewhere and it definitely gave me pause. Our children can always borrow for their higher education, we cannot borrow to fund our retirement. Find non monetary ways to support older dependents such as grown up children and elderly parents. Practising self care in regard to your finances ultimately creates a stable financial future for everyone.
GenXers may have been left behind financially to a large extent, however this generation of what were known as the latchkey kids, are a scrappy lot often learning through the school of hard knocks to be self sufficient and solutions focused. Once we are shown where we need to go, we will figure out the how to do it. Have confidence in the person you are and the abilities you have developed to get to this point. Use what you know or find out how, and do what you need to do. See you on the other side of financially successful retirement!
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