A lot of ink has been spilled about the millennial generation, but only recently has there begun to be a discussion about their patterns of saving and investment. That’s because the youngest millennials are only just now starting to enter the workforce. Like the generations before them, however, many millennials have poor financial habits.
Perhaps more than any generation previously, millennials are carrying a heavy burden of student debt. From their infancy, they were told by their parents that the way to get ahead in life was to get a college degree in order to get a good-paying job. As a result, a greater percentage of young people are going to college than ever before. But the fields they decide to go into aren’t necessarily those that are in demand by employers, so many millennials come out of college saddled with tens of thousands of dollars in debt and no real job prospects.
Many would have been better off having learned a skilled trade, becoming plumbers or electricians, or even starting their own businesses. But those weren’t even considered as options when they were going to school. So now we have the phenomenon of college-educated young people having to work as baristas or waiters because their degrees don’t qualify them for anything else. All the while, those mountains of debt remain unpaid.
Millennials also tend to spend more on frivolous things such as eating out. Rather than being an occasional treat, dining at restaurants is for many millennials a daily occurrence. Daily cups of coffee from Starbucks, lunch at the local carryout, and various other small purchases can add up to significant amounts of money. Millennials embody the “treat yo’ self” attitude perhaps more than previous generations, and the thought of denying themselves instant gratification in order to get more in the future isn’t widespread.
Lack of Incentive
Part of the reason millennials spend more and save less is that the incentive to save just isn’t there. Millennials were born during the “Great Moderation” and experienced the boom times of the Dotcom bubble and the housing bubble. Their expectation of economic growth is that things will be booming all the time, salaries will always be high, and the good times will roll constantly. Once they get their first jobs and can start to afford to spend money, they just assume that money will keep rolling in, so why bother saving for a rainy day, retirement, children’s college funds, etc? Those are such far-off points in time, and besides, they’ll be bringing in plenty of money by then. It’s only when the bust comes that they realize how mistaken they were.
Those boom times that disincentivize savings, and the busts that follow, are brought about by the Federal Reserve and its loose monetary policy. That loose monetary policy also results in rising prices, making it more expensive to get by year after year. The financial crisis shook confidence in financial markets, and the relatively weak recovery left very few good options for investment for a number of years.
Millennials realize that putting their money into a bank savings account is going to lose them money over time as their savings are eroded by inflation. And with a dearth of investment options, why not treat yourself now? Why scrimp and save only to see your savings lost to inflation or disappear in a stock market crash when you can live the good life today? That’s the attitude fostered by loose monetary policy. But it will end up costing millennials dearly when it comes time for them to think about retirement.
The first key to retiring safely is to develop a pattern of saving as soon as you have the means to do so. That means saving a portion of your paycheck as soon as you start working and putting those savings to work for you. Putting off saving for retirement and spending all of your paychecks is a recipe for a disaster. 72% of millennials have less than $1,000 saved up, and 31% have saved nothing.
One fender-bender or medical bill could end up wiping out their savings and forcing them into debt. And the lack of saving now could mean hundreds of thousands of dollars foregone by the time they reach retirement age. Waiting until you’re 30 or older to start saving for retirement could cut your potential savings in half, or more. Still, millennials are still young enough to learn from their mistakes and improve their habit of saving. Fixing their mistakes now before they grow too large could still get them on track for a secure retirement.