Tuesday, November 11, 2014

Millennial Problems

The Wall Street Journal reports that adults under the age of 35 have a negative savings rated of -1.8%. That means they are spending more than they earn; either by depleting their savings accounts or going further into debt. In the months following the recession this number peaked at +5.2% for these young adults sometimes called millennials.

This is scary dangerous. At that age there hasn’t been enough time for a young adult to build a significant emergency fund to protect against the loss of a job or some other misfortune. Unfortunately, this is the best time to save for retirement. Thirty years combined with the power of compound interest makes millionaires out of ordinary income earners. Even a few dollars regularly invested in a 401 (k) in the early years of a career can make a huge difference at age 65. Time is not a reversible process. Once those years are lost, it is very hard to recover.

It has always been difficult for people in their twenties to save. There are houses to buy, children to raise, furniture, as well as other traditional household formation expenses associated with young families. It has been more difficult for the millennials because many of them are preloaded with significant student debt. Before they can save for that 20% down payment on their first home, it can take a decade to get the student loans under control. Also they graduated just in time for a nasty recession. The recovery isn’t offering enough good jobs. College graduates are competing for jobs that do not require a college degree.

Anecdotal evidence seems to indicate that many of these young Americans have given up any hope of living what older folks would consider a normal middle class life. This age group seems to be spending a lot of money on their social life and travel. Some of it is understandable. With the average age for marriage and starting a family postponed by student debt and a shortage of good jobs, the millennials are spending more time socializing and more money in restaurants and bars than earlier generations. They also seem to spend a lot more time and money traveling than us older folks did at that time in our lives.

Money can not be spent twice. Money spent on an occasional luxury is gone. It can not be used to retire student loans or mortgage debt. It can not be used to invest for retirement or other long term goals.

From personal experience, I know that way too many of these young people, already dealing with higher unemployment and underemployment rates than older workers along with the added burden of student debt, simply do not understand the basic principles of personal finance. They didn’t understand that they were signing away ten or more years of their life when they took out those student loans. They didn’t understand that the free pizza and tee-shirt that came with the VISA card offered to them at the student center were going to turn out to be the most expensive “free” items they ever acquired. As parents and educators our generation has failed miserably in preparing these folks for life in the real nasty world where actions sometimes produce results that can not easily be remedied.

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