Disclaimer: This post covers some of my observations relating to financial trends and asset allocation. The views and opinions expressed in this post are wholly mine and do not necessarily reflect the views of my employer. Assumptions made in the analysis are not reflective of the position of any entity other than my own – and, since we are critically-thinking human beings, these views are always subject to change, revision, and rethinking at any time. Please do not hold me to them in perpetuity. While every caution has been taken to provide readers with most accurate information and honest analysis, please use your discretion before making any decisions based on the information in this blog.
Contrary to the media narrative that labels us as lazy and entitled freeloaders, millennials have it tough. Having lived through the Nineties and the Noughties, we have witnessed real wages decline, property prices propel and felt the burden of inheriting a broken financial system.
The modern-day cost of further education leaves the average student dazed and bruised well before they enter the ring to compete in the bloodbath that is the job market. With a higher proportion of young people opting for a university degree, employers are favoring candidates with concrete work experience as they sift through homogeneous honor rolls and degree certificates.
This trend which has been observed globally has led students to pursue further education in a bid to improve their CVs to appeal to their potential future employers. The pursuit of academic accreditation has led millennials to compromise income and workplace skills for the promise of enhanced earning capacity in later years. This leaves the average young person with little to no savings during the early part of adulthood.
Education is the most powerful tool on earth. In the information age in which we are currently living in, it’s of the utmost importance that millennials are continuously learning and developing new skills to keep ahead of the wave of technological and social developments coming our way.
In a world of cut-throat competition, individuals who do not prescribe to this way of thinking put themselves at risk of being unable to create value, subsequently swept aside by employers and clients as a result of skill obsolescence and knowledge stagnation. Change is afoot.
While I am immensely supportive of further education, and perpetual learning, prevailing economic fault lines and a lack of financial education could pose a serious threat to our generation of a similar magnitude to that of the 1930’s Great Depression. Below, I have highlighted a few general economic patterns, and the associated impact on millennial financial health (For this blog, the commentary below reflects trends observed in Europe and North America)
Young people have faced financial difficulty since time immemorial; most of us have juggled college, social commitments and part-time jobs at some point in our younger years. There are some romance and nostalgia in the process of growing up and having to awkwardly navigate adulthood with accomplices through pot noodles, borrowed Netflix passwords and unpaid TV licenses. There is beauty in the struggle.
Although the halcyon days of university and early adulthood account for memories with incredible replay value, there are some harsh truths waiting to be laid bare.
More of us are owning less.
Property prices have significantly outpaced income growth in big cities ( the hotbed of graduate employment) as a result of high demand driven by corporate interest, infrastructure development, and economic growth. Those seeking jobs in these regions are priced out of the housing market during their peak years of career growth. Millennials are left with no option but to rent and put off housing commitments till future years giving rise to a “rent culture.”
Our parents earned comparatively lower (inflation-adjusted) wages during the early part of their careers. However, they were able to benefit from acquiring assets at lower prices relative to their income. (I acknowledge that at a much higher interest rate and lower disposable earnings in the decades gone by, there is a valid argument for a higher relative cost of acquisition for the previous generation ). Wages have risen over the years, but the cost of living has (so far) overtaken that growth as middle-class goods and services have soared in price.
In the UK, a graduate who deposits £1000 in a savings account can expect a total around the range of £1015-£1030 (subject to rates offered) by the end of the year. To put this in some perspective, In London, an average cost of a happy hour pint of beer is £6.50. By the law of opportunity cost, none can blame millennials for opting to spend the money immediately rather than investing it to earn paltry returns. This brings about another challenge in the form of mustering an adequate deposit amount for a property.
Besides, as mentioned later on in this blog, the government’s continued persistence with quantitative easing (printing money to promote economic growth) will mean the precious cash saved up by millennials could have far less spending power in future retirement years.
The lack of capacity to purchase assets and an inability to get onto the property ladder till later in life would lead to a far-reaching strain on disposable income (for the individual and/or the family) wading through the middle age and trickling through to the current retirement age. Not owning a property would limit retirement funding options and inheritance planning.
Overall this trend risks to inhibit the quality of life, cause wealth inequality to widen and place further reliance on the government to prevent large-scale relative poverty.
The economy is not the only reason millennials are saving less.
Living in a hyper-connected society has also led to a change in consumption patterns for the average young person. With social media platforms such as Instagram and Facebook being used as marketing platforms for brands and influencers, users are bombarded with images and posts of latest fads and products tailored specifically to the individual through algorithms during each minute spent online.
With pressures to maintain and document a particular image repeatedly promoted by models, athletes, and entrepreneurs who have embraced the internet (and internet money), young people are inclined to give into the hype and spend funds that they scarcely have. Money is spent on products and services we don’t need to impress people we don’t like. (Champagne flair on a lemonade budget)
Time is precious. You are only young for a handful of summers. The tourism industry has thrived through social media with images and videos of exotic holiday locations across the globe taking over display screens instilling a (justified) fear of missing out among millennials. Savings balances are depleted through seeking these new experiences for leisure and self-development purposes.
Investing in experiences is never a bad idea, however casting a cautious eye to what one can afford with regards to leisure is advisable in an era where corporations are spending millions on ad revenue and artificial intelligence to distract us and make us give into our temptations.(Handy Tip: If you can’t buy 5 of product/service X with your total bank savings, you can’t afford 1 of product/service X!)
I remember it very well. Everyone in our generation was either directly or indirectly affected by the 2008 recession. If we thought the financial crisis of 2008 was bad, I sadly feel that it was just a precursor to the imminent pension fund bailouts that await us in the coming decades.
This comes at a time when the existing pension systems in many countries are not yielding an adequate level of assets to pay out future pension liabilities to employees. This is primarily due to years of historically low-interest rates in an environment where medical advancement is allowing people to live far longer than what was previously conceivable by actuarial models. It is reasonable to expect some form of government intervention in the future.
Without getting too technical, across Europe and Northern America there are two types of pension schemes, one where your employer guarantees a steady income throughout your retirement years; Defined Benefit, and a scheme in which your employer matches your annual contribution to by a set contribution percentage of your income across your working years with no employer liability during the employee’s retirement; Defined Contribution.
DB schemes are being slowly phased out due to increased concern by corporations over future liabilities. As you would expect, the majority of the current millennial workforce is enlisted on DC schemes where the individual is solely responsible for funding their lifestyle during retirement.
The potential future bailouts of DB schemes (a scenario where a government provides assets to Pension companies to fund the retirements of individuals to whom corporate employers were initially liable to) could also require the government to print more money as part of the funding process. A scenario where the public loses out further due to money supply led inflation, and future spending cuts can be envisioned causing income inequality to widen as the lower and middle classes bear the brunt of the changing landscape.
Once the implications are factored, to have sufficient resources to cover costs and living expenses during later years, millennial workers (largely DC holders) will be required to work longer, spend less and set lower expectations for retirement. (a far cry from the visions of spending your summers in Monaco, sailing into the sunset in your yacht)
I hope most of that made sense to you, dear reader.
To prevent the narrative of this blog from being the most depressing story ever told, I would like to suggest that it is not all bad news. Due to the economic growth that we have observed over the previous years, millennials would seem to gain significantly through the greatest wealth transfer in history from an inheritance perspective. Acquiring estates (houses, shares, cash reserves) which have grown in value over decades gone by will soften the blow of an uncertain economic future for those individuals who had the blessing of being born to asset-rich parents.
Ultimately I believe it is paramount that young people actively look to invest and save from an earlier age to achieve some level of autonomy and leverage over their financial situation in future years. As millennials approach prime consumption and spending years, consumption and investment patterns can have a significant impact on the economy. In my next blog, I will look to list a few ways in which millennials can go about taking the first steps into investing.
Once again, thank you for reading my blog. This topic has been playing on my mind since I took my first accounting classes back in 2012. The process of writing this article has been beneficial to me as I have attained more knowledge on the areas expressed above (Always in appreciation of the process). It was bothering me that the majority of my generation was blissfully unaware of certain worrying emerging trends which led to the inspiration behind this piece.(Through no fault of their own, blame the lack of financial education being taught in schools/universities).
As always, I would sincerely appreciate and value all your thoughts and comments.
Till next time.