Millennials. Yuck. Just typing the word makes me feel like a bitter old person. Millennials are blamed for just about everything. They’re blamed for destroying department stores. They’re blamed for destroying the diamond industry. They’re blamed for everyone in the country having their faces stuck in their phones at all times. Millennials. Total punching bags. There’s probably truth to some of things that millennials get blamed for. But when I say blame, I could just as easily mean scapegoat. Millennials haven’t exactly had it easy despite what other generations think. Older millennials entered the job market during the worst recession in decades. Millennials have been completely unprepared for real employment by ridiculously over-priced higher education and worthless degrees. Millennials have also inherited a bloated, inefficient government to pay for. All while their wages stay stagnant. They’ve got it bad. Full disclosure, I am a millennial. And don’t scoff, boomers. I’m more than happy to take you to the woodshed as well. It’s much easier than you think it is. Trust me.
The financial strife facing the millennial generation in 2018 and beyond has been well documented and is very real. This is quickly becoming a lost generation. One that will ultimately become dependent on social safety nets funded by their children and grandchildren; a solution that is both unrealistic and completely unsustainable. So, how can we fix the problem ourselves? I believe the first step in fixing the problem is understanding the problem. What has doomed this generation to debt serfdom?
The Federal Reserve – AKA The Market Puppet Master
One of the big factors that has contributed to the current problem is low interest rates. Lower interest rates encourage spending over saving. Millennials, as a generation, have experienced an artificially suppressed Federal Funds rate for nearly 10 years; essentially their entire adult lives. That has an impact – consumption from easy credit; millennials don’t know anything else. With inflation, purchasing power goes away, but debt gets cheaper. So, when you factor in the idea that some economists believe true inflation is much higher than the 2% reported by the Fed, it makes sense that young people are treating USD like a hot potato. Unfortunately, we can’t control the Federal Funds rate. But there are behaviors that we can control to improve the health of our personal finance.
Social Media – FOMO Spending
A study by Credit Karma found that 40% of millennials admitted to FOMO spending. What is FOMO spending? Fear of Missing Out Spending – simply put, spending money they don’t have to keep up with their friends. What might be worse is the same study says 73% of those who do it keep it a secret. They know it’s a bad idea. They do it anyway. That’s tough behavior to change. The good news is two thirds of them have buyer’s remorse after living beyond their means; hopefully, that’s a signal that this trend will slow down or better yet, reverse.
Social media plays into all of this. Even though social media use is now widespread, Millennials, are the ones who have been using it for half of their lives. And social media is largely a ruse. For the average person, the Facebook feed is their channel. It’s how they’re disseminating information to their peers. Or pick any social media outlet. Instagram is a big one in this regard. When someone shares something on Facebook or Instagram, they’re showing you their best self – with a filter! It’s what they want their friends to think their life truly is. This has a larger psychological impact beyond monetary behavior – but that’s a story for a different post. For now, it means that people are seeing their friends “living the life.” And when you see that, you want it too. It’s human nature. Millennials have chosen to live that life as well – even though many don’t have the wealth necessary to do so. It’s a problem. But social media isn’t the only reason they do it.
Financial Literacy – Compounding Interest, anyone?
I work in a business that attracts a lot of millennials. I get to speak with the younger portion of my generation regularly. One thing that seems fairly consistent in our chats is the value millennials put on “experiences.” Experiences. It’s kind of a “life is not guaranteed, so enjoy it now” approach to recreational spending. To a certain point, I get it. But there has to be a balance. I’m all for enjoying your time when you have the means to actually do it. Overspending to enjoy that time means that you aren’t financially able to live the lifestyle that you want – and you’re going to pay for it down the line; literally and figuratively. According to the previously cited Credit Karma study, 40% of the millennials who overspend to keep up with friends do it on travel. Again, “experiences.”
For every millennial I work with who owns their own home, there are 5 who rent and go out drinking on the weekends. Here’s why that’s a problem: 66% of millennials don’t have anything saved for retirement. I don’t want to oversimplify the issue because there are a variety of factors; I alluded to some of them already. But, personally, I believe one big controllable factor is that millennials don’t truly understand compounding interest. Maybe the James Altucher video where he says investing in a 401k is a bad idea has swayed their opinion – maybe they just haven’t really thought about the math. Whatever it is, millennials would be better served saving for their retirement in some way even if they don’t have a 401k. Instead of burning through $50-100 FOMO spending every weekend, open a Roth IRA and put just $100 into a low-cost, passively managed SP500 ETF every month. If you do this for 10 years, every month, your initial investment of $12,000 will turn into over $19,000 thanks to the magic of compounding interest (assuming an average annual return of 10% in the SP500) – if you continue it for 10 more years, the $24,000 investment turns into just under $69,000. 30 years? You’re at just under $200k for the price of $36k- this is how you grow wealth. If you’d rather purge your cash for fun now and be dependent later, I can’t help you.
Millennials really need to take a look in the mirror. They need to ask themselves what they can do to make their lives better. Uncle Sam is not going to save them. I can argue that millennials have been dealt a pretty bad hand, but passing the buck to taxpayers is not going to work. We can’t control the Federal Funds rate. But we can control how we spend our currency and how we plan for our futures. Just because we get a great interest rate on a credit card, it does not mean we need to open that credit card. We don’t need to live beyond our means. We don’t need to try to keep up with the digital Joneses. Now that we understand the saving strategy, we need to talk timing your investments. Just because compounding interest in the overall market is the magic sauce for financial freedom, it does NOT mean you can expect the average annual return every single year. I would never advise buying at the top of a market. Are we there now? I’ll examine that in a future post.
IF YOU ENJOYED THIS ARTICLE, YOU’LL LOVE JIM GRANT’S FINANCIAL PODCAST!
Disclaimer: Views and opinions expressed by Mike are not necessarily the views and opinions of CLNS Media. You can follow Mike on twitter @MikeFay34 and read his stock market technical analysis at faybomb.blogspot.com