millennial finances
According to the Strauss-Howe generational cycle theory, members of Generation Y parallel and share traits with the young people who came of age during the Great Depression. While the economic woes of today haven’t been as severe as those faced eighty years ago, they’re still formidable, and having to endure these challenges seems to be spurring Millennials to adopt the kind of prudent and thrifty habits their grandparents once evinced.
Such habits will surely help them weather the economic difficulties of our time, and prepare them to handle an age of prosperity if/when it returns in full force.
While these nascent trends are encouraging, they still need to be furthered and strengthened. The worst of the 2008 recession may be over, but the future remains uncertain, the economy continues to be soft, and many Millennials are still struggling financially, both in terms of raw income, and in simply knowing how to protect, manage, and grow their finances. They’re struggling just to keep their head above water.
The economic “Big One” we’re facing down can either be an excuse for hopelessness, apathy, and retreat, or an opportunity to rise to the occasion, to find a better path, to zig when the world zags — to make the obstacle the way.
For those who’d like to take the latter course, today we visit the financial issues facing Millennials, offering practical advice and strategies on how these challenges can be surmounted. By making these countermoves around the obstacles in the economic landscape, Millennials can become more financially savvy, scrappy, and nimble — just like their grandparents before them.
Millennials’ wages are stagnant
Research shows that Millennials are earning 22% less than Baby Boomers did at the same age. Further, the outlook in the near future isn’t great; not only do individuals who graduate into a recession earn less money at their first job than those who enter the workforce during a boom time, they earn 2.7-8% less every year for up to two decades.
Part of the reason individuals who enter the workforce during an economic downturn earn less for so long is that the experience of coming of age during a recession tends to make them risk averse. When such individuals do get a job, they’re more anxious about holding on to it and maintaining the income they have coming in — no matter how meager it is. This makes them less likely to look around for higher-paying opportunities, or to risk rocking the boat by asking their boss for a raise — even after the economy has recovered.
Fortunately, circumstances aren’t destiny and this scarcity mindset, as well as its income-depressing effects, can be overcome by actively choosing to have an aggressive attitude towards finding the best possible position and getting paid what you’re worth. Researchers suggest that the wage penalty for starting work in a recession can be eliminated by negotiating for a raise once things pick up economically or by switching jobs.
So if you want to get ahead financially, you need to start playing to win, instead of playing not to lose. Start boning up on how to ask for and negotiate a pay raise. A single raise can boost your salary by thousands of dollars. Properly invested, that single pay raise can result in hundreds of thousands of dollars saved during your working life. Yet so few people ask for raises! And the main reason is fear.
Millennials are financially fragile
According to an inc.com survey, 62% of Millennials would have difficulty covering an unexpected $500 expense. In the survey conducted by PwC, nearly 32% of Millennial respondents reported that they were regularly overdrawing their checking accounts. Because of this, more young adults are turning to payday loans to get by, a recourse that can end up putting them deeper into the hole.
When you’re unprepared for an unexpected expense, you’re financially fragile. You want to become financially antifragile instead.
The first step to becoming financially antifragile is creating a $1,000 emergency fund. If you’re strapped for cash, this can seem like an impossible goal, but with a bit of determination, you can achieve it in a surprisingly short time.
Back when my wife and I were first married, we were both in college, working minimum wage jobs, and up to our eyeballs in student debt. The idea of having $1,000 in savings seemed impossible. But after cutting back on a few expenses and selling a bunch of crap on Amazon and eBay, I was able to sock away $1,000 in a savings account in less than a month. Instead of relying on credit cards to pay for unexpected car repairs which arose not long after, we were able to use our emergency fund.
Once you’ve got your $1,000 stockpiled, and have paid off any high-interest credit card debt (which most Millennials don’t have in the first place) and your student loans, you can set the goal of creating a fund to cover 3-6 months of necessary living expenses. It will feel awesome to get that antifragility-producing safety cushion in place.
Millennials are burdened with student loan debt
With the cost of college tuition having soared the last two decades, Millennials are entering adulthood with more student loan debt than any generation before them — an average of $35,000 worth. That number can increase several times over if they went to a private school or pursued a post-graduate degree.
Student loan debt doesn’t just sap Millennials’ bank accounts, but also hinders them seizing opportunities and moving forward with their life. Over and over again, they report that their debt is the thing that’s keeping them from pursuing goals like getting married, buying a home, or starting a business.
Removing the stumbling block of your student loans will make you far more financially nimble, so make their elimination a top financial priority that you aggressively pursue.
If you have any private variable loans, pay those off first. Sure, the interest rate on them might be lower than federally-backed student loans, but if the Fed decides to hike interest rates in the future, the rate on those variable loans could climb 5-6%, says Mark Hartmann, publisher of FinAid.org. That could make your payments on those loans unmanageable. Better to pay them off now.
For your federally-backed student loans, you have eight repayment plans to choose from. Most young people make the mistake of picking the plan that has the smallest monthly payment. Doing so causes you to pay more on interest over the loan’s lifespan. Rather, pay as much as you can on your student loans. Find ways you can save and earn more money (see below) and put it all towards your student loans. The short-term sacrifice will reap long-term benefits.
Millennials are financially illiterate
According to a PwC survey, only 23% of Gen Yers demonstrate basic financial literacy in regards to stuff like how mortgages and the stock market work. In a survey of Millennials already saving for retirement, a third said they were “not sure” how much of their money was invested in stocks vs. mutual funds. Even Gen Y business owners are often not so confident about their financial acumen; almost half rate themselves as just “somewhat” knowledgeable about and successful in managing their business’s finances.
Not knowing the nuts and bolts of money matters can hurt Millennials’ personal financial prospects in the long run, as well as their entrepreneurial dreams. You can’t fight a problem you don’t understand.
Get an autodidactic education in personal finance. Research shows that Millennials see personal finance as an important subject to learn: 78% think it “should be taught by high schools, 74% say it should be taught by colleges and 72% feel it should be taught by parents.” Unfortunately, most young adults probably didn’t get that desired education from any of those sources. But it’s never too late to learn, and with all the free information online, it’s never been easier to give yourself a complete self-education in personal finance.
The same PwC survey cited above found that only 13% of Millennials have sought professional help with debt management and just 26% have sought professional advice on savings and retirement. You don’t need to fight your financial battle alone. If you find yourself in over your head with your debt, consider seeking credit counseling. The non-profit National Foundation for Credit Counseling (NFCC) can put you in touch with an accredited credit counselor.
If you’ve got a handle on your debt, but need some help navigating savings and retirement, find a fee-only personal finance advisor. A fee-only advisor charges the client directly for their services instead of relying on the commissions that come from selling customers certain investment funds or insurance policies.
