Based on an initial glance at the general habits of Millennials one would most likely scoff at our spending habits, willingness to save, and lack of financial literacy. We seem to spend a ridiculous amount of our money on unimportant things like coffee, random crap on Amazon, and super-awesome cocktails at hipster bars downtown. However, if you look with a bit of a wider lens you’ll notice a generation that, whether purposely or not, seems to have learned a lesson from the great recession.
But first, let’s get the bad out of the way.
That obvious observation about how much we spend on cold brews, cocktails, and phones is part of a trend. Millennials have a tendency to want to keep up with the Joneses largely because of social media. Three-quarters of us desire to have the same cars, gadgets, and clothes as our friends (what are we still in high school?). This mentality leads to overspending and rash credit card use. In my opinion, this is asinine and immature. One of the universal pieces of advice that you’ll get from a personal finance blogger, a financial advisor, or a semi-intelligent ape is to spend less money on crap you don’t need. And a piece of advice from me: don’t be a 12-year-old and stop planning your life through social media.
We also tend to justify large expenses for travel or “experiences.” This is a significant departure from Baby Boomers who see those expenses as less important. I definitely fall into this trend. My wife and I attempt to travel abroad once a year because who wants to spend their whole life only seeing the U.S.? Yes, MRIKA! is awesome, but there are so many wonderful things to see and people to meet around the world. The key to doing this in a financially responsible way is to have a solid plan to keep costs down (I’ll have a post on cheap/awesome vacationing later).
Another significant problem is Millennials financial literacy. When tested on financial concepts only 24% showed basic financial knowledge. That lack of knowledge is reflected in the mentality of 7 out of 10 Millennials who think that being financially secure means being able to pay your bills every month. That qualifies as being barely not poor. All it takes is one unexpected financial issue and you’ll be massively in debt or worse.
Oh, and did I mention student loans? While student loans don’t necessarily show bad financial habits by our generation, they are a huge burden.
Ok enough with the bad, what about the good?
Despite our bad spending habits (travel semi-excluded), Millennials are surprisingly good at saving, especially when compared to the generation preceding us (Gen X). Older millennials have already surpassed Gen Xers in saving with 33% having over $1,000 in a savings account vs. 30% for gen Xers, and we are on the heels of Boomers when it comes to retirement preparedness. And they are already starting to retire! Millennials also seem to be getting better at saving over time.
Every time an organization looks at why it is that Millennials are willing to start saving early in their lives it seems that the financial crisis of 2008 plays a big factor. As we witnessed the savings and investments of millions of older Americans disappear we undoubtedly internalized the lesson: don’t trust the economy to be happiness and butterflies forever. Now that we are working adults there is an uneasy feeling that a situation like that could happen again. That feeling is reflected in both our saving habits and our desire to invest responsibly.
You might be wondering why I threw out that random $1,000 number earlier.
Well, it’s because only about 31% of Americans have more than $1,000 in their savings account. Let that statement sink in for a second. How amazing is that? How irresponsible? It makes me wonder if we are just that confident in the future of our economy or that confident that our welfare system will save us if we experience a major economic downturn. Or maybe everyone just wants to be a Kardashian that badly. All those mindsets are naïve. Thankfully Millennials seem to be doing away with the assumption that the economy will always grow, even if many of us are spending money on dumb things.
So, do Millennials have their $$$$ together? Meh….
Hopefully, time will end our obsession with showing off how “cool” we are on social media with all the gadgets we buy. Based on the rise of Millennial finance blogs and a general desire to avoid the same financial hardship as older generations did, I believe that we’ll slowly fix our financial illiteracy as well. But the most important starting point is to save money. It’s great that many Millennials seem to already know how to save, but many of us need to save much more. There are several different recommended levels of saving. Fidelity says 15% of income. A more common baseline is 10%.
When people hear those number their eyes get wide and they think, “how the hell am I supposed to live without that much of my money?” The truth is it’s not that hard. It’s all a matter of priorities. Here is how I do it:
First, I try to max my ability to save every month by immediately putting 10% in my Roth IRA as well as another 10% in my savings account prior to spending any money. I treat my savings account as a sacred place that may only be touched in case of dire emergency. This way I force myself to live on 80% of what I earn to start with. When I get my next paycheck I never spend the extra money I have from the previous paycheck. Instead of viewing the rollover amount as extra spending money I put that in my savings and start the next month over. In the end, my wife and I save at least 25% of our income every month and sometimes more. We ain’t what you would consider rich either, it’s just a matter of discipline.
So, don’t order that $15 caipirinha this weekend and start putting a bit of your extra cash in an IRA. It’s time to grow up financially Millennials.