Millennials, also known as Generation Y or Gen Y, are the demographic of people born in the 1980s or 1990s. They are sometimes referred to as “echo boomers” due to often being the children of “baby boomers”. According to PEW Research Center (link), many millennials are now reaching their prime working and earning years. As of 2016, millennials made up the largest generation employed in the workforce, passing baby boomers and Gen Xers.
Millennials are generally well educated, tech savvy, and have an entrepreneurial spirit, which can be a great asset in financial success. However, this generation faces financial burdens that Gen Xers and baby boomers, in general, did not have. As a result of this, many are managing money differently than other generations and struggling financially.
The following are some of the major challenges for millennials:
Crushing Debt
According to a 2018 study by NBC News/GenForward (link), about 75% of millennials have debt, mostly student loans. The rising costs of education and increase in the cost of living has resulted in a significant increase of relying on loans. With 25% of millennials carrying over $30,000 of debt, and 11% carrying over $100,000 in debt, building wealth is difficult when so much of your income is going to pay down loans.
Great Recession
Millennials grew up or entered the workforce during the Great Recession (link) in the late 2000s. As millennials started launching their careers, many struggled to get a secure job that paid well. The Great Recession, in many ways, shaped millennials’ relationship with money, creating anxiety about financial security and distrust in the stock market.
Little Emergency Savings
Millennials tend to have very little, if any, emergency savings. Most are living paycheck to paycheck. When an emergency happens that causes financial strain, many will likely put some of their expenses on credit cards, causing them to go even further into debt, or rely on their parents for financial assistance.
Lack of Financial Literacy
Financial skills are rarely taught in school. If families do not discuss issues such as credit scores, taxes, and interest rates in the household, the realities of what it takes to be financially successful can be overwhelming.
Investing Too Conservatively
Studies have shown that the millennial generation overwhelming distrusts stock markets and is more cautious in investing than Gen X(link). They are generally risk averse and reluctant to invest in the stock market, which can undermine their ability to fund retirement.
Inflating Living Costs
Millennials entering the workforce face the highest cost to rent of any generation. The average monthly rent, according to a Zillow report (link), in the U.S. is $1600, while Generation X paid $850 at the same stage of life. Home ownership, automobiles, childcare and education costs have also risen sharply for millennials compared to past generations.
***So, what is a millennial to do?***
It is difficult to build wealth if you are struggling to keep your head above water financially day to day. A good place to start is with a budget. If you know how much money you earn and exactly where your money is going, you will have a clear understanding of the changes needed to be made in order to attain your goals.
It is vital to establish an emergency fund to protect yourself financially when emergencies happen. Having cash reserves will help to avoid credit card debt and the risk of needing financial support from others. A simple way to help achieve this would be to establish an automatic funds transfer to a savings account which will help gradually increase your savings and help to stay consistent with your goals. A suggested amount for an emergency fund is 3-6 months worth of expenses. Once this is established, you may choose to concentrate on more aggressively paying down debt or contributing more towards retirement. Contributing even a small amount towards retirement as early as possible is a powerful way to grow your money for long-term goals.
A shift in mindset to include long-term financial goals versus strictly immediate goals may be challenging. Clearly defining your short-term and long-term goals is important to get a sense of direction and to put in place the strategies to achieve them.
Most millennials are now reaching the age of key milestone financial decisions, such as purchasing a home, or long-term investments. It is good practice to complete thorough research and seek professional advice, if necessary, before you make any major financial decision. This can help you to have the best outcome for financial success and peace of mind.
Carol Chaudet
(Updated 6/26/2019)