How to Pay Off Debt and Live Your Desired Lifestyle

When given the choice between saving for their desired lifestyle and saving for retirement, nearly two-thirds of millennials would choose the former, according to a new Merrill Edge report. This is also the generation that prioritizes travelling and working their dream job over getting married or becoming a parent—in fact, 81 per cent of millennials said they’re more likely to spend on travel than save for their financial future. But when it comes to debt, some millennials might be in deepest. Manulife Bank found that out of all homeowners, millennials had the most mortgage debt, and 45 per cent of those millennials would struggle to make mortgage payments less than three months after losing their job.

Of course, it makes sense that millennials would have the largest mortgages, as they likely have more time remaining to pay off a recent house purchase, as opposed to a baby boomer who might just have a year or two of payments remaining. However, one-quarter of millennials have no savings at all, and could struggle to make ends meet when faced with an emergency. Overall, more than half of Canadians could not afford a mortgage payment increase of five per cent or less—so how would it be possible to travel, find your dream job and pay off debt?

Millennials are making more money than their parents

Although many millennials borrowed or received money from their parents in order to purchase their first home, they might actually be ahead of their folks financially. Stats Canada has found that up to two-thirds of Canadians who turned 30 since Y2K had a greater household income than their parents at the same age. But, even with larger incomes, many may not be able to afford a home, or are paying a greater percentage of their income toward a mortgage, what with Toronto housing prices rising 33 per cent over the past year. While this would not reflect any millennials still in their 20s, recent statistics suggest that today’s university graduate receives an average starting salary of over $54,000. So many might be able to afford to travel after all.

But with rapidly rising mortgage debt combined with lingering student loans, can millennials follow their dreams and pay off debt?

How to travel and pay off debt

The blogosphere offers some inspirational examples, like Emma, the 32-year-old who paid off $30K debt and now chases summer around the world. Another travel blogger, Mapping Megan, offers seven tips for travelling while in debt. Some of these tips can be applied to everyday living, as well, like paying cash for everything and planning free activities. But ultimately, when it comes to paying off debt and living your desired lifestyle, it’s all about budgeting.

One basic budget principle is the 50/20/30 rule, where you put 50 per cent of your income toward essential spending, 20 per cent toward savings and 30 per cent toward “expenses that enhance your lifestyle.” This category could also be considered “wants” (as opposed to “needs”), but, as financial tracking app Mint.com points out, “in modern society, many of these so-called luxuries have taken on more of a mandatory status.” So where do your travel plans fit in? You could put some of those expenses, such as spending cash for a vacation, in the “30 per cent” category, but ultimately, your best bet is to save up for a vacation—which would belong in the 20-per-cent savings bucket.

Taking a new approach to saving

Since most millennials aren’t focused on saving for retirement, it’s time to re-envision savings to include debt repayment, vacation spending and other life goals. You’ll also want to make sure you’re saving for an emergency; the Manulife study found that 24 per cent of millennials had no savings whatsoever. While you can add to your vacation fund in the meantime, you might want to prioritize putting aside up to six months of living expenses to cover any costs should the unexpected occur—and help you make those mortgage payments if you lose your job or your interest rates rise.

One way you can plan to pay off debt and set savings goals—whether for a vacation, an emergency fund or buying a home—is with the Financial Consumer Agency of Canada (FCAC)’s Financial Goal Calculator. This interactive tool can calculate how much you will need to save and help you set a timeframe to reach your goal. You can choose between a plan to get out of debt or setting savings goals—or even do both simultaneously!