What matters about money for millennials?
The millennial generation are forging a new path when it comes to personal financial management. Not fitting into moulds that previous generations so simply conformed to, the millennials are the most studied generation to date.
The term millennials is used for those born between 1980 and the mid-1990s, and is also referred to as Generation Y. Due to the major surge in birth rates in the 1980s and 1990s the population within the Millennials surpassed those within the “Baby Boomer” generation, giving way to the nickname “Echo Boomers”.
In the UK the biggest financial concerns for the millennials seem to be; rising house prices, debt, and employment difficulties. Surprisingly, pensions do not seem to be as much of a concern for millennials as they were for previous generations.
These concerns and worries have been a result of various factors including the 2008 financial crash, introduction of university fees, a rising retirement age and the ability to “borrow from the future”.
Global financial crisis
As the millennials were coming of age, the global financial crisis of 2008 struck the markets, beginning in 2007 with a crisis in the sub-prime mortgage market in the US, and eventually developing into an international banking crisis.
It is considered to be the worst financial crisis since the Great Depression, and had a profound effect on millennials whose ages at the time ranged from 13 to 28 years old.
The older half of the generation were at a major turning point in their life regarding personal finances. Watching the value of assets such as houses, that had previously been seen has relatively stable, drop by 16% in 2008, posed some major theoretical questions into the generation’s minds.
Why would I save to buy a house when the value is so volatile? Does renting a property come with the flexibility that I desire and no long term commitment? Can I spend the money I have now, knowing I will get the full value of my money today?
These questions have delayed millennials becoming homeowners. In 1991, 67% of 25 to 34 year olds were homeowners in England; by 2011-12, this had declined to 43%. This is a large drop over 10 years, and the financial crisis has a huge part to play.
Another significant factor is student debt.
University tuition fees were introduced in the UK in September 1998, meaning every millennial has had to pay in order to attend a higher education establishment.
Student loans were available for those who could not pay the large upfront sum. Taking out a loan and have it slowly paid off whilst working was a seemingly great idea although put an “out of sight, out of mind” attitude into millennials.
With the university fee at £1,000 per annum in 1998, it has continuously grown, and in the upcoming autumn students can be charged up to £9,250 per annum. This new higher fee did not affect millennials but it illustrates the point that in 19 years there has been an 825% increase in cost, which they certainly did feel the effect of.
This is a significant amount of debt young adults agree to pay in the future, where a blasé view was taken and the gravity of the debt was unbeknown.
Today millennials are paying off their student debt, but there is a clear reluctance to enter any further debt. In conjunction with the 2008 financial crisis, the introduction of student debt led to the reduction in homeowners between the ages of 25 to 34. The fear of getting a mortgage and increasing the already large debt is not worth owning a house in the eyes of millennials.
A large concern for millennials is how to repay these growing debts without a job.
With the UK retirement age increasing, and with plans announced in July 2017 to increase the state pension age further, we have an ageing workforce. As a result, the number of workers in the workforce is growing, without new jobs becoming available.
Millennials are the most educated generation to date and despite this, there is a growing unemployment rate due to the fact that they are the least experienced.
In April 2017 the millennial unemployment rate stood at 12.2% which is more than double the national average of 4.5%. It is becoming an accepted fact that graduates will not find a job immediately after gaining their degree. Pre-empting unemployment young adults are seizing opportunities they might otherwise not have taken, resulting in money save being pushed down the priority list.
Additionally, compared to previous generations there is a lesser concern regarding pensions with these changes to retirement age.
As a collective, millennials will be spending the majority of their active life working and earning. A survey conducted in 2012 by PwC analysing 23-25 year olds concluded “millennials are at the start of their working lives yet they are already tapping into their retirement account”.
Only 36% have a retirement account, and in the 12 months prior to this survey, 17% took a loan and 14% took a hardship withdrawal. The recurring attitude of millennials to personal finance seems to be borrow from the future and deal with the consequences later.
With more interest in enjoying the moment, money that in previous years had been saved, millennials would prefer to spend on experiences rather than things.
As our society is becoming more interconnected, we know more about the world in which we live. There is the desire to embrace everything the world has to offer now, resulting in little consideration for the future which eventually will become detrimental.
I spoke to Nick and Victoria, both part of the Informed Choice team, to get some practical advice for millennials. Having financial concerns is daunting but it’s not too late to start getting on track to your financial goals.
“Even if it seems you couldn’t possibly take money away from your income to save, it’s best to get in the habit.
“If you start by saving a small amount that you wouldn’t notice each month, you’ll get the ball rolling.
“The earlier you can start saving the better, as you can benefit from compound investment growth. Soon enough you’ll be surprised by the amount you’ve saved and how little it affected your pocket!”
“There can be a view that you should prioritize getting a house over saving a pension, in fact you can put aside a little each month for all you would like to save for example house, pension, and ISA and it shouldn’t be noticeable.”
“Student debt comes out of your gross salary in the same way as tax and national insurance. Even though the total may be a large figure, only a percentage of your current salary will be taken. The amount taken only grows when your salary increases, so it’s all relative.”
“It is a good idea to invest in a house, because generally the value doesn’t change greatly, even after the housing crisis the average house price has increased beyond the average in 2008. It is an investment for yourself rather than renting to pay someone else’s mortgage.
“Once you retire you will continue to rent and have nothing to show for the years you have rented. The hardest part of getting a mortgage is the deposit, thereafter you are paying a monthly mortgage similar to rent, with an asset to show for it once you pay it off.
“Additionally, if you invest in a house and decide you would like to downsize once you retire, you avoid capital gains tax. Essentially, the difference is tax free.”
“It is a good idea to invite the baby boomer generation in your family to pass on some of their wealth, as there was a strong culture to save. Ask your parents and grandparents to have a proper financial plan so they can work out how much they can give you during their lifetime.
“Don’t fall into the trap of thinking that the baby boomer generation had it easy because we didn’t, we had our own struggles but have come out on the other side!”
The millennials have been affected by; a financial crash, rising housing prices, and student debt. The outcome has become an attitude to avoid further debt, in hand with a hesitation to save and a desire to live in the now.
Talking to our team it is best to save, especially in order to become a homeowner and for a pension.
If you are struggling, ask your parents or grandparents to have their own robust financial plan so they are able to help to their best ability by sharing some of their wealth.