One of the most popular pastimes of the 21st century, it would appear, is millennial-bashing. Hardly a week goes by when an article doesn’t pop up in your news feed about yet another product or industry that young Americans are “killing” by refusing to feed it the dollars it deserves. Millennials – defined by Pew Research as Americans born between 1981 and 1996 – stand accused of murdering everything from starter homes to paper napkins, and the list of their crimes goes on and on.
The reason for this killing spree, according to many commentators, is that millennials are lazy, self-absorbed, and addicted to luxury goods. They can’t save enough for retirement or a down payment on a house because they’re frittering away all they have on avocados and expensive electronic gadgets. The image that best captures this stereotype is a 2013 Time magazine cover that portrays a young woman taking a selfie with her iPhone, accompanied by the headline, “The Me Me Me Generation.”
New research, however, paints a very different picture of millennials. Studies suggest that millennials do indeed have their share of financial problems, including lower real wages, lower assets, and higher student loan debt than earlier generations. However, these very problems have led Generation Y – as they’re also known – to be extra careful about managing what they have. They seek value with their purchases, save as much as they can, shy away from debt, and invest with caution.
All in all, it looks like rather than poking fun at millennials, the talking heads of the Internet would be better off trying to learn from them. Here are a few of the most important lessons this generation can teach us all about how to handle our money.
Lesson 1: Get More for Your Money
According to a 2018 study by the Federal Reserve, millennials spend less across the board than baby boomers (those born between 1946 and 1964) and Generation X (those born between 1965 and 1980). Part of this is simply because millennials are younger, so they tend to have lower incomes. However, the authors also note that millennials are earning less, on average, than boomers and Gen Xers did at their age. As a result, they’ve been forced to curb their spending even more than young Americans did in the past.
Because of this, millennials focus on getting the most out of every dollar they spend. This shows up both on a large scale in the categories where these consumers focus their spending, and on a small scale as they seek the best value with every individual purchase.
Spend Less on Luxuries
The stereotype of millennials is that they tend to spend frivolously, living in their parents’ basements so they can blow their paychecks on new fitness trackers and gourmet coffee. But the picture painted by the Fed study suggests exactly the opposite. It shows that millennials are spending a bigger share of their income on necessities, such as housing, food, and health care, than older Americans did when they were young. By contrast, they’re spending less than earlier generations on clothing, entertainment, and alcoholic beverages – in short, the kinds of expenses most people would label as frivolous.
However, the authors note that these differences in spending are largely due to changes in the economy as a whole, rather than specific choices by millennials. All Americans today – not just the younger set – are spending a larger share of their income on housing and health care than they did in the past because home ownership costs and health care costs have risen faster than prices in general. Likewise, all Americans today are spending less on clothing, which has gone down sharply in price as more clothes are made overseas. So millennials can’t necessarily get credit for spending less money on luxuries than earlier generations – but they’re certainly not spending any more.
Spend More on Experiences
One difference between millennials and older generations is that Gen Y prefers to spend more money on experiences. In a 2014 Harris poll, 78% of millennials said they would rather spend money on experiences than material things. More than 80% of millennials said they had taken part in a variety of live experiences – such as parties, concerts, festivals, sporting events, and cultural performances – in the past year, as compared to 70% of other generations.
According to economists, that’s a smart choice. Numerous studies in the field of happiness economics have found that spending money on experiences brings more satisfaction than spending the same amount on possessions. The Harris Poll suggests one reason for this: Great experiences become happy memories that you can enjoy for a lifetime. More than three out of four millennials reported that events or live experiences they’d taken part in were among their happiest memories.
Ignore Brand Names
Another difference between millennials’ spending habits and those of earlier generations is that they’re far less brand loyal. According to a 2017 study by Cadent Consulting Group, more than half of millennials say they have “no real preference” between name brands and private-label products, as compared to just 39% of baby boomers. Cadent cites this as one of the biggest factors behind the steady growth in the popularity of store brands since 2005.
Ignoring the name on the label and focusing only on what’s inside the package helps millennials get more value for their shopping dollars. A 2015 analysis in Consumer Reports found that supermarket store brands cost about 25% less overall than name brands, and in many cases, their quality is just as good.
Some newer retailers, such as Aldi, Lidl, and the online store Brandless, are appealing to Gen Y’s focus on value by offering a curated selection of high-quality, private-label products. For instance, Brandless carries organic virgin coconut oil, “tree-free” toilet paper, and kid-friendly, organic applesauce pouches, all for just $3 per item.
Lesson 2: Focus on Savings
Despite their frugal habits, many millennials still struggle to save money. In a 2017 survey of over 8,000 Americans by GoBankingRates, over 60% of all millennials said they had less than $1,000 in the bank, and over 40% had no savings at all. The Fed study found slightly more encouraging results, showing that millennials held a median of $4,400 in total “financial assets” in 2016. However, this still puts them behind baby boomers, who held a median of $5,600 in assets at the same age, and Generation X, who had $6,800.
However, this isn’t because this generation isn’t focused on saving. On the contrary, in a 2018 survey by Allianz Life Insurance, over 40% of millennials said they set aside money for savings every month. That’s 5% more than the rate for Gen X respondents, who generally make more money.
The 2018 Better Money Habits Millennial Report from Bank of America, which covered 1,500 Americans across all age groups, found even stronger results. In that survey, 63% of millennials said they were saving. Over half of all millennials (57%) said they had a savings goal, and two-thirds of them said they met that goal every month or most months. By comparison, only 42% of both baby boomers and Gen Xers had set savings goals.
So why are so many millennials having trouble saving? Both the Fed and GoBankingRates point to two factors: low salaries and high student loan debt. Not only are millennials earning less money than earlier generations did at their age, they’re also graduating from college with more student loans to pay off. These payments create a steady drain on their finances that makes it harder for them to save.
Still, studies show that some millennials, at least, are managing to overcome these problems. The small Bank of America study found that 47% of millennials had at least $15,000 in savings. The larger GoBankingRates study paints a much less rosy picture overall, but even it found that 13% to 20% of millennials had at least $10,000 saved up – and that number had risen sharply from 2016 to 2017.
Saving for Retirement
When it comes to retirement savings in particular, Generation Y is doing even better. Numerous studies show millennials are getting started earlier on saving for retirement, and saving money at higher rates, than earlier generations. Here’s a sampling of their findings:
- How Many Are Saving. According to a 2018 survey by the TransAmerica Center for Retirement Studies, 71% of all millennials are working on saving for retirement. They’re not as likely to be saving as older folks who have had more years to work on this goal, but the survey indicates that millennials got started earlier. The average millennial started saving for retirement at age 24, compared to age 30 for Generation X and age 35 for baby boomers.
- How Much They’re Saving. Millennials are also more likely than other generations to be saving at least 10% of their monthly salary for retirement, as most experts recommend. The Allianz survey found that 48% of millennials who had a 401(k) were contributing at least this amount, beating both baby boomers (44%) and Gen Xers (36%).
- How Much They’ve Already Saved. Although financial experts say no generation, including Gen Y, is really saving enough for retirement, they agree that millennials are doing a better job than previous generations. Data from the Federal Reserve’s Survey of Consumer Finances shows that 42% of Americans under 35 had a retirement account in 2016, with a median balance of $12,300. That’s not much, but it’s a lot better than having only $120,000 when you’re within 10 years of retirement age, which was the case for the average baby boomer. The 2018 Fed study showed that millennials also had more saved for retirement than earlier generations did at their age: an average of $18,800, as compared to $16,800 for Generation X and just $6,600 for baby boomers, who often had pensions to rely on instead.
- According to the most recent Survey of Consumer Finances, households headed by someone under age 35 have a median $12,300 in retirement savings. That’s not enough. But neither is $120,000, which is the median for ages 55 to 64 – and those people are actually on the brink of retirement age.
Some finance writers warn that, because millennials are making less money than earlier generations, they need to boost their savings rates by even more to meet their retirement goals. For instance, a 2016 CNBC article points to a survey claiming that a 25-year-old earning $40,000 per year – the median for people in that age group – would need to save 22% of that income to have enough to retire at age 67. However, experts interviewed for the article generally agreed that this goal is unrealistic. They said millennials who are currently saving a more reasonable 10% of their income can reach their goals by taking advantage of employer matching funds and boosting their savings a little more every time they get a raise.
Lesson 3: Avoid Consumer Debt
Millennials certainly have their fair share of debt. The 2018 Fed survey found that, overall, the average millennial in 2016 had $43,700 worth of debt. However, that’s still less than the $49,000 in debt the average Gen Xer had at the same age. Compared to Generation X, millennials owed less money on mortgages (as discussed below), less for credit cards, and about the same amount for car loans.
The one category in which millennials owed significantly more was student loan debt. About one in three millennials had a student loan balance in 2017, as compared to only one in five Gen Xers in 2004, and the median balance on those loans was about $18,000 for millennials and only $12,800 for Generation X. However, many financial experts consider student loans to be good debt because a college degree is an investment that will pay for itself.
It’s possible that some millennials carry less debt simply because they’re too young to have a solid credit history, so they couldn’t borrow money if they wanted to. However, the evidence suggests that many of them don’t actually want to. The number of credit checks – which are required to take out a loan – was much lower in 2017 than in 2004, and the decline was especially sharp when comparing millennials to Generation X. The study’s authors suggest that the 2007 financial crisis may have made millennials more debt-averse as they saw how much damage it did to individuals and the economy as a whole.
Millennials are particularly wary of credit card debt. A 2018 story in MarketWatch reports that Americans under 35 have much less credit card debt than all but the oldest Americans (those ages 75 and up). People under 35 carried an average of $5,808 in debt, while those between 35 and 64 had between $8,200 and $9,000.
In fact, many millennials won’t use credit cards at all. According to a 2016 Bloomberg story, only one in three millennials carries a credit card regularly. A 2018 study by Bank of the West found that nearly half of millennials don’t normally use a credit card even for online purchases, and only 38% of millennials use them in stores.
Experts say this avoidance of credit card debt is a smart money move. Any kind of debt drags down your budget with constant monthly payments, but credit card debt is an especially heavy load because the interest rates are so high. The heavier student loan debts millennials bear, by contrast, tend to have relatively low, fixed interest rates and long payment terms, so they’re less burdensome.
Lesson 4: Don’t Buy a House You Can’t Afford
One type of debt that millennials have a lot less of than older generations is mortgage debt. According to the Fed study, millennials had an average mortgage balance of $24,300 in 2016, compared to $33,700 for Generation X in 2004.
That isn’t because millennials are buying smaller houses or getting especially great deals on mortgage loans; it’s because fewer of them are buying homes at all. A 2017 story in Business Insider reported that homeownership rates for Americans ages 25 to 34 – formerly seen as typical first-time home buyers – had hit a record low. Some commentators take this as a sign that millennials prefer renting over homeownership and even point to it as an example of how flighty this generation is, claiming they’re unwilling to put down roots anywhere.
However, a 2018 piece in Forbes tells a different story. It says 82% of millennials consider buying a home to be a priority, and they’re also more likely to be interested in owning an investment property than either Generation X or baby boomers.
Although millennials aspire to homeownership, they’re putting it off for now because they can’t afford it. At the end of 2018, according to Zillow, the median home price in the United States stood at $222,800. For a house that price, a 20% down payment would come to $44,560. Between their below-average incomes and above-average student debt, that’s more than most millennials can manage to raise.
By waiting to buy a home until they can afford it, millennials are avoiding overstraining their budgets or sacrificing other goals, such as saving for retirement. In fact, according to Business Insider, over 25% of younger millennials ages 25 to 34 are continuing to live with their parents so they can save even more money.
Lesson 5: Don’t Hesitate to Ask for a Raise
Though stereotypes paint millennials as unambitious, the 2018 Bank of America report found that they’re not shy when it comes to asking for a raise at work. According to the survey, 46% of all millennials had asked for a raise in the past two years, as compared to 36% of Gen Xers and 39% of baby boomers. Moreover, 80% of those who asked for a raise got one.
Being willing to ask for a raises boosts your finances in two ways: It puts more money in your pocket here and now, and it also increases the amount you can put aside for retirement. If you’re currently setting aside 8% of every paycheck, then boosting your income from $3,000 per month to $3,500 will automatically add extra $40 per month to your nest egg.
However, if you go a step further and boost your savings rate from 8% to 12% at the same time, you’ll boost your retirement savings by $180 per month – an increase of about 75%. And you won’t feel any poorer for it since you’ll still have the other $320 per month to spend.
Lesson 6: Invest Carefully
Several studies have found that millennials tend to be more conservative with their investments than earlier generations. In the Bank of the West survey, two out of three millennials said they felt “more comfortable” keeping the majority of their money out of the stock market. The 2018 TransAmerica study found that 22% of millennials have their retirement savings stashed mostly in safe funds – such as bank accounts, money market funds, and bonds – as compared to only 15% of Gen Xers and baby boomers. And a 2018 Vanguard study says that about 25% of the company’s Gen Y investors have “cautious” portfolios with little money in stocks.
Lower Risk, Lower Returns
Many financial writers see this trend as troubling. They point out that, while stocks are riskier than other types of investments, they also have higher returns over the long term. By keeping their money out of the market, they argue, millennials are putting their retirement security at risk.
However, others say this fear is exaggerated. The authors of the Vanguard study point out that the vast majority of millennials actually are investing in stocks; only one in four are avoiding them. They also note that many millennials are new investors, who often take a year or two before diving into the stock market.
There’s one thing millennial investors are definitely doing right: reducing the amount they pay in fees. A 2018 study by Charles Schwab shows that over 90% of the company’s millennial investors name exchange-traded funds (ETFs) as their investment vehicle of choice. On average, they have 42% of their portfolios in ETFs, and more than half of them say they always buy ETFs rather than individual stocks.
ETFs are funds that track a market index, such as the S&P 500. When you buy one, it’s like putting a tiny amount into every single stock in that index. This allows you to benefit from the long-term gains stocks have to offer, while shielding you from the high risk of buying individual stocks. They also have much lower fees than many other types of funds, so choosing them helps you keep more of your investment returns in your pocket.
Though millennials are doing many things right with their money, there are still areas where they could improve. For instance, many of them could benefit from taking a little more risk with their investments, especially their retirement savings. Although most of them are cautious with credit cards, many of them still have some high-interest credit card debt weighing them down. And while spending money on experiences rather than belongings makes sense, getting those same experiences for less money – for example, by traveling on a budget – could help them save even more.
Overall, though, Generation Y seems to be very responsible with its money. Millennials are spending less, getting an earlier start on retirement savings, and avoiding debt more assiduously than Generation X and the baby boomers before them. That doesn’t mean the rest of us should be copying millennials in everything, but the least we could do is stop sneering at their avocado toast.
Do you think you handle money like a millennial? In what ways?