• Investing & Markets

Millennials Are Financially Doomed! Or Are They?

May 14, 2014 | Financial Samurai

“Our youth now love luxury. They have bad manners, contempt for authority; they show disrespect for their elders and love chatter in place of exercise; they no longer rise when elders enter the room; they contradict their parents, chatter before company; gobble up their food and tyrannize their teachers.” – Socrates, 500BC.

Who doesn’t know a Millennial who acts spoiled, narcissistic, entitled, and completely unable to focus for longer than 15 seconds? Suddenly, ADHD is an epidemic excuse that is sweeping our youth for why they can’t do better at school or come in to work on time. There’s always an excuse, but there’s always time to update a status on Facebook or Instagram with a “selfie.” Interesting.

There seems to be an explosion of contempt for the Millennial generation – loosely defined as those born between 1980 – 2000 – with articles such as “Generation Me” splashed across the front cover of Time magazine last summer. But as you’ve just read from a quote widely attributed to Socrates 2,500 years ago, youth have been disrespecting their elders for a very long time. On the flip side, elders have been showing disdain for youth for an equally long period of time.

One theory for such contempt is that as we grow older, we get jealous that we are no longer as good looking, healthy, and vibrant as we once were. So of course, we take it out on the next generation. “Youth is wasted on the young,” as George Bernard Shaw once said, because the young are incapable of fully appreciating what they have until they are old.

At Personal Capital, we embrace the Millennial generation for their creativity and sense of purpose. There are always generational differences, but that’s what makes society great. Our main mission is to allow people of all age groups to lead better financial lives. Millennials may have less money than older demographic groups, but they have much more time to generate wealth

Below is an infographic we created with our friends at Mint.com to demonstrate how a typical Millennial named “Milli” might be able to boost her retirement portfolio by 18%. The infographic purposefully simplifies asset allocation to get more young people thinking about their money. And in particular, thinking about easy ways to not leave money on the table. We believe that getting your asset allocation right is the most important part of getting on track for long-term financial health, which is why we focus on it.

Too often we hear from clients who say they regret not focusing on their finances in their 20s. By creating something easy to digest, hopefully more people will care about their money earlier on. Let’s have a look.

MILLENNIALS INFOGRAPHIC

Millennial InfographicThis infographic was originally published on Mint.com

COMMENT RESPONSES USING PERSONAL CAPITAL DATA

We received a number of comments on Facebook about our infographic by Millennials, and we’re addressing five of them here based on data we have from our over 500,000 registered users and $500 million in assets under management.

Response #1: How is this a typical financial profile for a millennial? $100k in savings at age 30? An $80k per year job? Where is the crushing student loan debt listed?

Answer: We created the asset allocation for Milli, a typical Millennial, with the help of Personal Capital data. To simplify our analysis, we just showed the investments side of the picture. First, let’s note Millennials are anyone born from 1980 onwards (we looked at Personal Capital users aged 20-34).

Because of our software, we can get some nifty information on this population segment.

  • We know that they’ve got, on average, $100,000 in investible assets.
  • We look at just their portfolios to see asset allocation pictured in the infographic. Note that the cash is only cash in their investment account.
  • We don’t have income information for everyone, so we extrapolated $80,000 for total earnings (see below).

Response #2: What about student debt?

Answer: In 2010, student debt eclipsed credit card debt. Saying that the growth of student debt in the US is a huge problem is an understatement. According to the Project on Student Debt, over two-thirds of college seniors graduating last year had nearly $30,000 in debt – a figure which has climbed 6% a year since 2008.  U.S. Secretary of Education, Arne Duncan, has said about student debt that “In fact, it’s very good debt to have.”

But the problem is that student loans stay with people for life.  For the average Personal Capital user who has linked a student loan the figure is ~$40,000. That might not be so bad if salaries were increasing.  As the Economist wrote in a recent article on the student debt crisis, tuition has grown at 5x the rate of inflation salaries have “remained flat for much of the last decade. Student debt has grown so large that it stops many young people from buying houses, starting businesses, or having children.”

Response #3: I don’t know any 30 yr olds with 80k salaries, just saying.

Answer: This is a fair comment! The 2010 Census reported median income for 30-34 year olds was $39,000. We’d imagine the average is slightly higher based on the fact that the mean salary for an American is 50% greater than the median (but that figure is not reported by age group).

Why is Milli’s income higher?  $80,000 includes her total income. If you look at the numbers, if you’ve accumulated $100,000 in savings at 30, it’s about what you would have to have made.  Take a look at the hypothetical savings scheme below.  It tracks someone who graduated from college in 2006, and could afford to save $10,000 per year, with 3% earnings growth a year and a healthy 6.5% portfolio growth (of course, these are simplified assumptions):

Savings_Scheme
So what can we infer from the comparison of our hypothetical individual, Milli, who managed to achieve $100,000 in savings by 30, to the median American Millennial? In all likelihood, the sample set of people who are using Personal Capital are wealthier. That selection bias makes sense to us – it’s a subgroup of the population concerned with their investments and focused on improving their financial health with the use of the (free) tools at their disposal.

Perhaps there’s more to it.  Maybe it’s also the case that using technology improves your financial picture (that’s Personal Capital mission, after all).

Response #4:Way to make me feel like I’m underperforming Mint.

Answer: Our goal with the infographic is to show Millennials how they can be doing even better. It’s easy to ignore our long-term financial health (and often, as we know from cases of crippling student debt that sometimes we’re forced to ignore it), but there are parts of our financial lives that are actually easy to get on track.  Asset allocation is one of them. Our main message: getting the right asset allocation in your portfolio is an easy way to grow money that you’ve worked hard for.

And for those who feel behind, know that reading financial blogs and using free financial software, you’re already a step ahead of the game. What’s hard is getting ahead at work, and deciding to save instead of buy. One can either get motivated to save and invest more (and invest smarter!) or do nothing and deal with consequences later. The choice is yours.

Response #5: I read last night that most 30-somethings have 42% of their portfolio held in cash. I was flabbergasted.

Answer: We’ve read other reports that are similar. For instance, a recent UBS report claimed that Millennials “are the most fiscally conservative generation since the Great Depression…their average asset allocation is extremely conservative, with the average portfolio dedicating 52% to cash, compared to 23% cash for other investors.”

That’s not what we’ve found among our users. Millennials hold 12% of their portfolios in cash – much more than they need to. That figure EXCLUDES cash in savings accounts. Having extra cash in a savings account is appropriate; we think 6 months of your spending as an “emergency funds” is prudent.

What’s more interesting about the UBS report is the qualitative data they report about Millennials. “We see investors who are extremely conservative, savers not investors, and not nearly as self-directed as one would expect. And they worry about their parents’ financial health and futures as much as they worry about their own.” While there’s been some press about the rise of the “do-it-yourself” investor, we’ve found that people like having the comfort of an expert opinion when it comes to their finances. And, tying it back to the intro

CONCLUSION

The greatest two assets Millennials have are energy and time. Eventually both will fade, so it’s important to take advantage of every opportunity while we still can. There was no such thing as Personal Capital’s free Financial Dashboard to track one’s net worth and analyze one’s investments five years ago. Take advantage of us and other free tools as much as possible. But most of all, don’t forget to save. Once you develop a systematic habit of contributing as much as possible into your 401k or IRA, and investing any leftover after-tax proceeds wisely, you’re well on your way to financial freedom.

Photo Credit: WikiImages, public domain.

Co-Writer: Catha Mullen

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