Feckless spenders - saving and investing in a millennial’s world
By Stephen O'Toole on Monday, 29 July 2019
It is fair to say that millennials are on the receiving end of persistent scorn from their elders. Apparently, it is their love of smashed avocado, chai lattes and Instagram worthy holiday destinations - and a constant need for instant gratification wherever they look - which stops them from saving and investing in their future selves.
But take a closer look, and the real story starts to emerge. These 20 and 30 somethings are in fact struggling to grow into, and take control of their lives, for just some of the following reasons:
- Financial pressure and rising debt
- Housing unaffordability
- Job insecurity and the gig economy
- Social media addiction
- Instant gratification syndrome
- Body image pressures and mental health issues
The final three points about social media, instant gratification and mental health are closely attributed to the technological dependence of the young today. We’ve all lived through and seen the fruition of the digital age, and these ‘advancements’ have been most keenly adopted by millennials. The result is the hyper connectivity of millennials to media - their brains clouded by a constant stream of advertising and notifications, all through the smallest of devices. ZeroHedge refers to it as ‘communication overload’ - creating a constant flow of dopamine, but weaker and less significant than when achieved through interactions with other humans.
This point about technological dependence is obviously part of a much wider discussion. However, its impact is vital when attempting to frame the reasons why millennials are struggling financially - as well as exploring how the best features of this technology can be utilised to improve their situation.
Young people are saving less - but why?
Millennials are often portrayed as feckless spenders. There is some truth to this - mainly due to the advent of contactless payments, and the relatively cheap and accessible nature of credit. However, there are wider socio-economic factors that young people are having to grapple with.
Firstly, there are some serious challenges around intergenerational wealth which are finally coming to light. In May 2019 the FCA released a discussion paper on Intergenerational Differences. Their findings were interesting because they identified that patterns of wealth accumulation and decumulation have changed dramatically in the last decade - so for example, people of working age had less total wealth than compared to people of the same age 10 years earlier. Also, the median person starts accumulating property wealth 4 years later (from 30 in 2006-08 to 34 in 2014-16). So baby boomers have benefited from asset appreciation and defined benefit pensions throughout their working lives - whilst their children are left with high barriers to entry and stagnant prices on the housing market, insecure employment, rising inflation and a weak pound due to the calamitous effects of Brexit.
Therefore, saving and investing is simply more difficult today than it was in the past. This is part of a wider pattern amongst all of society, not just young people. In April 2019 This Is Money reported that Britain’s saving habit had stalled. The household savings ratio - the percentage of disposable income being saved - stood at 4.5% in the fourth quarter of 2018. But this ratio is historically low - it was consistently over 10% in the late 80s and 90s and has dropped well below 10% (and stayed there) since 2014. So, if the average household is having to dip into its savings to fund their day-to-day, what chance do millennials have?
There are of course proactive steps the young can take to improve their own situation - most importantly, how can they utilise their knowledge of, and reliance on, technology? The answer may lie somewhere between the convenience of app-based finance, and the more traditional methods of financial planning and spending.
Define your goals
The first stage of any financial planning is to define goals. These can be categorised into short term (3 months or less), medium term (3 months to a year) and long term (1 year or more). So, whether it’s paying off a credit card bill or even starting to save for a deposit on a home - what are you willing (and able) to dedicate to each of these in monetary terms?
Going through this exercise can also help you ascertain how much disposable income you have available for the day to day. For those with families, you might also have much longer-term goals such as paying for your child's education - so what are you able to set aside, invest and take a risk on because of the long-term nature of that objective? Without these time bound plans in place, the already confusing world of personal finance can simply become overwhelming.
Automate, automate, automate
The proliferation of mobile technology has led to a hugely competitive and diversified banking and investing landscape in the UK. The sheer variety of banks (both high street and challenger) as well as platforms and budgeting tools may in fact contribute to the communication overload referenced earlier. However, this new technology has one key feature - automation - which should take a lot of the pain and procrastination out of putting money aside.
Direct debits are the simplest way to siphon off funds into savings accounts or investing platforms. Services have also sprung up due to the increased usage of contactless payments - namely the Monzo coin jar and Moneybox - which round up each tap of your debit card to the nearest pound, diverting the difference into savings accounts or investment products.
The benefits of automation can also be applied to that longest of long-term goals, retirement. The move away from defined benefit to defined contribution workplace pension schemes - part of the wider shift of responsibility from the state/workplace onto the individual - is another modern-day reality that millennials have to grapple with.
But so far, it seems they are doing a good job. A recent report from the DWP, evaluating the impact of pension auto-enrolment in the workplace since 2012, found significant increases in participation amongst younger age bands, who are now less likely to opt out when compared to older colleagues approaching retirement. Larger employers are likely to better than match employees’ minimum contributions, meaning auto-enrolment is likely one of the best investing habits for millennials to pick up early in their working lives.
Cash is king
Paying for goods and services with your debit or credit card is undoubtedly convenient, and now part of everyday modern life. The explosion of contactless payments, and its usage amongst millennials in particular, has led many to argue that cash will soon be obsolete.
But people do a lot of stupid things in the name of convenience - including leaving a trail of personal data, the type of data that will form part of an immediate future where technology is full interconnected, and every digital touchpoint is linked to the ‘internet of things’. Could this data ever be exploited by governments, corporations or even our most loved brands?
Cash should not be consigned to the history bin just yet. In fact, a recent NBC blog post argued that feeling the 'pain of paying' in cash may help people get their budgeting back on track. Withdrawing a set amount of cash and allotting it to your week of work and pleasure, can help in dedicating your remaining balance to a saving or investing goal. Cash users are also better at recalling aspects relating to an items cost compared to debit and credit card users.
Redesigning policy and education
My worldview may seem cynical, but there is some hope. Young people are more financially savvy than we give them credit for. The Guardian recently reported on real customer data drawn from smartphone-based banking service Revolut’s servers - Seven out of 10 young adults are regularly putting money aside, with almost £174 a month being saved on average (£254 in London). Not quite enough for a deposit on that first home, but a start.
What we need and expect from financial services changes over time. Baby Boomers, Generation X and Millennials lead very different lives, and have different financial needs as a result. This is not just a challenge for the financial sector. There is also a central role for public policy makers, and regulators need to adapt (quickly). The strategic objective of the FCA is to ensure that financial markets work well and serve the public interest - their decisions should be based on an understanding of what will best meet consumers’ needs and prevent harm.
But maybe this needs to start even earlier. Does the next generation need to be educated on the basics of finance, as well as the benefits and pitfalls of technology, at an even earlier age? In our always on world, the preference is for the here and now - this need for instant gratification is hardwired into us, and even more difficult to control when everyone is hyper-connected to technology and media. Addressing these challenges requires a collective effort - otherwise young people will continue to face a series of difficulties in building wealth.
Here at Teamspirit, we work exclusively with financial services clients to make their products and services accessible to more people (including millennials) - turning the complex into the compelling to create deeper, more meaningful relationships between brands and their audiences.