In Debt and Not Really Saving, Either: Millennials prioritize lifestyle over building wealth

When it comes to love or money, millennials choose love.

Financial advisor Robert Fenton says the scenario is more complicated than just being careless with cash.

“I believe millennials today are a bit more balanced than maybe [baby boomers] were,” said Fenton, an advisor for Raymond James Financial in Traverse City. “The thought is, ‘Maybe I don’t have to work 70 hours a week, seven days a week, 51 weeks a year to be successful.’ I think people are redefining what success is, and that’s totally up to them to do.”

A study by the advocacy group Young Invincibles showed that millennials – those born after 1980 –  earn 20 percent less than what baby boomers were earning at the same stage of life.

Net worth was worse: The average millennial has $10,000 — 56 percent less than the average baby boomer did when approaching the age of 30.

How millennials work in the emerging “gig economy” has also affected the income/cost of living balance.

“A lot of companies are moving away from the traditional ‘come in and sit in a cubicle’ model,” said Jamie Keillor, financial advisor with Edward Jones. “Millennials work from home, maybe three or four jobs freelancing instead of one. Companies have downsized staff and are outsourcing a lot of jobs. That makes it difficult for millennials. When you look at what they’re getting paid versus cost of living, there are obviously some very big discrepancies there.”

Keillor says the breakdown of the traditional job and the near-ubiquitous presence of student debt are the biggest barriers millennials face when building wealth.

“We’ve become so accustomed to the mentality that it’s okay to have debt,” she said. “Our grandparents’ generation didn’t like debt. They would go without everything to pay debt down as fast as they could.”
Assessing priorities – wants versus needs – and clearing debt are two things that need to happen for wealth to accumulate, Keillor said.

“There is no good sticking money into an IRA or a 401(k) when you have debt at six, seven, eight percent interest,” she said. “Millennials need to say, ‘Okay, we’re not going to do this or buy that. We are going to take everything we have and pay off the debt.’”

Paying off debt isn’t as glamorous as buying the latest iPhone, purchasing a new car, or picking up the next round of drinks at the bar. How can millennials — often labeled the “I want it now” generation — start spending money more wisely?

Erik Gruber, member at Sagemark Consulting Private Wealth Services, advises young clients to hack temptation through passive saving techniques.

By setting up three or four separate savings accounts, clients funnel $50 or so weekly into new car, vacation, or house funds, Gruber said.

“It becomes habitual. They don’t have to make any clicks to make it happen. They don’t have to write any checks. It’s just automatic,” he said. “So [the money] comes out the day after their payroll hits, and it’s gone before they get a chance to blow it on cocktails. And that’s been pretty effective, because even after a few months, you see, ‘Oh, there’s $1,000 there, but had I gotten my hands on it, it’d be gone.’”

Gruber says the early habit is more important than the size of the transaction or investment. Because of college debt and high living costs — particularly in cities — millennials often fall into the “I’ll start saving money later” trap.

As “later” moves further and further down the road, millennials lose their biggest asset for wealth building: time.

“It’s a long arduous process,” Keillor said. “You’re not going to get one paycheck and be able to toss a huge amount of money into [your retirement account].”

Fear of losing what they have is another savings block, Keillor said.

“That’s the challenge I see a lot, which is that they would just rather not do it,” she said. “They would rather say ‘I’ll deal with it later. Someday, I’ll make more money and I can deal with it then.’”

For parents who want to instill savings habits, starting early is key. Gruber recommends that millennials begin learning how to save when they land their first jobs.

Keillor echoes the same recommendation to her clients, while also encouraging families to research various four-year college options, which can range from $7,175 to $14,286 in Michigan.

Adding desire and discipline helps complete the puzzle, says Fenton, who recommends all millennials – regardless of income – work with a financial planner they trust to develop a reasonable savings strategy.

“Wanting to save money and work toward financial goals is the first piece; being able to adopt and follow through on strategies for saving and investing is the second,” he said. “Personalizing a savings plan that is suited to your financial standing and your short and long-term goals is the best way to knit both pieces into a cohesive whole.”

Eight Tips to Spark Millennial Financial Planning

  1. Sit down with multiple financial advisors to talk savings strategy. Find someone who you feel comfortable with, no matter how long that takes.
  2. Put a savings plan in place, personalized to suit your income, goals, debts, and expenses.
  3. Prioritize paying off high-interest debt, such as college loans.
  4. Use an online money manager, like Mint, to pay bills, monitor credit score, track spending, and set monthly budgets.
  5. Cut your spending by distinguishing “wants” from “needs.”
  6. Set up automatic weekly or monthly transfers from your bank account into savings or retirement accounts.
  7. Have a 401(k) or IRA, but be passive about its year-to-year performance. Compound interest takes time.
  8. Make sure you have key estate planning documents in place. A last will and trust, a living will, and a power of attorney are all essential, even for 20- or 30-year-olds.