President Obama touched down in Cuba last week, making him the first sitting president to visit the nation in eighty-eight years. As the President and the First Family toured the historic center of Havana, they likely witnessed the stunning old city filled with the vintage cars and delicious cuisine that make Cuba unique. As a result of the embargo, Cuba sometimes seems like a land forgotten by time. However, the Cuba that the Obamas are witnessing this week  is very different than the Cuba the average tourist may experience in the next ten years.  As more opportunities for investment and travel open up in Cuba, foreign investors are making moves–especially within the hospitality sector. Consider that Marriott CEO Arne Sorenson is accompanying President Obama on his visit to Cuba–Marriott may be interested in investing on the island. Read on to see which companies are investing in Cuba and why.

Hotels and Hospitality

Starwood Hotels, the company which owns Westin, Sheraton, and W Hotels (just to name a few), made headlines by announcing that it will open three hotels in Cuba.  At the moment, all Cuban hotels are state-owned but Starwood has the financial and organizational power to build hotels that meet the state’s standards. The location of the third hotel has not been made public but the company has stated that the Hotel Inglaterra, which is owned by a Cuban state tourism company, will become one of Starwood’s Luxury Collection hotels and the Quinta Avenida, which is run by a Cuban military-run tourism group, will become a Four Points by Sheraton hotel.

The potential Starwood-Marriott merger that is currently on the table could have a major impact on how these new hotels will be built and run.  On the heels of the Starwood commitment, AirBnB has announced it will open listings on the island by April 2. AirBnB has in fact been planning for the opening of the country for some time now–last year, the company claimed the right to represent all private residences in Cuba. AirBnB’s chief executive Brian Chesky referred to Cuba as the fastest-growing country that AirBnB has ever launched in. Physical accommodation is not the only segment of the tourism sector that is expanding into Cuba: online booking website Priceline, Western Union, and Carnival cruises have all thrown their hats into the ring (Carnival will begin sailing cruises to the island in May). Multiple U.S. airlines have filed for permission to fly commercial flights into Cuba. At the moment, American citizens cannot travel to Cuba on a tourist visa but visas falling under the following twelve categories have been opened:

Family visits, official business of the U.S. government, foreign governments, and certain intergovernmental organizations, journalism, professional research, educational activities, religious activities, public performances, clinics, workshops, athletic and other competitions, and exhibition, support for the Cuban people, humanitarian project, activities of private foundations or research or educational institutes, exportation, importation, or transmission of information or information materials and certain export transactions that may be considered for authorization under existing regulations and guidelines.

Travelers must provide itineraries that justify their visa, but they no longer have to apply for a formal travel license from the government. Ease of travel is drawing a steadily increasing number of Americans to the island. According to  Jose Luis Perello Cabrera, an economist at the University of Havana, there was a 36 percent increase in the number of Americans visiting Cuba between January and May of 2015 alone.

American investors for the most part are flocking to the hospitality industry but there are a handful of cases of more specific investments. Consider Alabama-based Cleber LLC, a tractor company which was the first company to receive joint approval from the Cuban government and the U.S. Department of the Treasury. Cleber LLC is looking to produce tractors in the newly built port of Mariel just outside of Havana, claiming that these tractors will deliver both a financial profit and an ethical good–improving the quality of life of Cuban farmers. Tractors are just one element of machinery that Cuban farms and factories are clamoring for and as the market continues to open, an increasing number of small businesses like Cleber LLC will be given the opportunity to sell their specialized products on the island.

Chinese Investment in Cuba

American companies are not the only investors chomping at the bit to launch projects in Cuba. Venezuela has historically been Cuba’s largest trade partner but in recent years, China has been vying for that position. Cuba has long been reliant on Venezuela for oil but the regime has now turned to China for its technology and infrastructure needs.

American companies such as AT&T have projects in Cuba waiting in their pipelines but Cuban authorities have resisted American telecommunications investment. Instead, they have turned to Chinese operators such as Huawei Technology Co. Ltd., which was tasked with installing fiber-optic connections in Old Havana. Professor William M. LeoGrande of American University has said that “partly that’s a result of the fact that historically we’ve tried to use telecommunications as an avenue to undermine their government, and so consequently they really don’t trust our hardware.”  Silicon Valley tech companies are getting left behind as Huawei installs dozens of Wi-Fi hot spots around the island. Huawei has also partnered with the Cuban telecom company Etecsa to distribute smartphones, further anchoring its brand with the Cuban public.

The economic exchange between the countries has also led to Cuban efforts to break into Asian trade: Cuba’s Havana Club rum has launched major marketing campaigns targeting the Chinese market, hoping that it will be a gateway to Asia as a whole. In 2015, airlines began operating direct flights between Beijing and Havana as both Chinese investment and tourism in Cuba soared. Although Chinese investors have not paid as much attention to the hospitality sector as American companies, China’s Suntine International-Economic Trading Company has partnered with Cuba’s Cubanacan hotel group to launch a new “Hemingway Hotel”–a luxury hotel with a price tag of at least $150 million. If the Hemingway Hotel project succeeds, then Chinese corporations may commit to more hospitality projects–putting them in direct competition with companies like Starwood and AirBnB.

Conclusion

Although foreign investment appears to open up new opportunities for the Cuban people, it has been argued that foreign companies will only further entrench the power of Raul Castro rather than aiding the general Cuban populace. American (and other foreign) companies hiring Cuban workers will not necessarily be allowed to hire employees directly. Instead, they may only be permitted to hire people through state agencies, effectively blacklisting anybody the regime has deemed unacceptable. Foreign investors will pour their money into the regime itself rather than into the individual bank accounts of Cubans who they hire at their enterprises. Cuba is a nation with a rich cultural heritage that travelers have been drawn to for centuries but many Americans are unfamiliar with the island’s government and its approach towards controlling the population. As diplomatic relations between the U.S. and Cuba expand, American investors are trickling into the country, hoping to prepare it for a potential flood of tourists in the coming years.

While Americans seem to have gained the upper hand regarding early investment in hospitality services, Chinese and Venezuelan companies have been positioning themselves to win the contracts on Cuba’s largest infrastructure projects. Tech investment could be a battleground, as Cisco has already committed to a training institute and Google is interested in working on Cuban connectivity but Chinese investment in Cuba’s internet has already put them at a significant advantage. The swell of foreign investment in Cuba may not provide the stability and equality that optimists hope for, but it should not be dismissed outright. Allowing open commerce and investment in Cuba will allow the nation to engage in the global economy in a way that it has never before–but it is, at least at the moment, unclear who will truly benefit from this expansion.

Resources

VOX: Airbnb and American Hotels Aren’t Wasting Any Time Ppening up in Cuba

USA Today: Starwood: 1st U.S. Company to Run Cuba Hotels in Decades

New York Times: American Firm, Starwood, Signs Deal to Manage Hotels in Cuba

CNBC: Marriott, Starwood Team up to Take on Airbnb in New Merger

New York Magazine: Discovering Cuba, One Airbnb at a Time

Financial Times: No Flood of Investment Despite US-Cuba Thaw

ATTN: 12 Ways You Can Legally Visit Cuba

NPR: U.S.-Cuba Ties Are Restored, But Most American Tourists Will Have To Wait

AP News: Stunning 36 Percent Rise in US Visits to Cuba since January

Worker’s World: U.S. Investment in Cuba: How a Little Red Tractor Jumped to Front of the Line

American Enterprise Institute: Why US Investment Won’t Bring Change to Cuba

Wall Street Journal: U.S. Competes With China for Influence in Cuba

Jillian Sequeira

Jillian Sequeira was a member of the College of William and Mary Class of 2016, with a double major in Government and Italian. When she’s not blogging, she’s photographing graffiti around the world and worshiping at the altar of Elon Musk and all things Tesla. Contact Jillian at Staff@LawStreetMedia.com

The post The New Cuba: Who is Investing in the Island? appeared first on Law Street.

There’s a hot, new startup in town and it’s solving a problem that has long gone unanswered–how to get medical marijuana delivered to you. It’s called Eaze and it’s being promoted as Uber for weed. As more and more states legalize marijuana, and many more allow the substance to be used for medicinal purposes, the commercial industry is going to continue booming. Eaze wants a piece of that–and from the looks of it, so do Eaze’s many investors.

The San Francisco-based company has already gotten quite a bit of funding. In its series A funding round–essentially its first big push for venture capital money–it received a very impressive grand total of $10 million. One of the more prominent investors is Casa Verde Capital. For those of you for whom that doesn’t ring a bell, that’s the name of the venture capital fund run by Snoop Dogg. Although this was Eaze’s first major funding push, it also received $1.5 million at the beginning of last year to get started.

Calling Eaze the Uber of weed, or at least medical marijuana, seems pretty much spot on. Users can order the drug with the click of a button, and Eaze promises a ten minute or less turn-around time. The company connects already-existing dispensaries with customers, and has a fleet of drivers ready to transport the orders. Eaze also allows customers to look through what each dispensary offers, including lab results, in order to find a good match between customer and product.

The business certainly has some kinks to work out, but they seem to be relatively minor. TechCrunch’s Ryan Lawler tried it out over the weekend and pointed out that right now it only accepts cash, which can be viewed as inconvenience for anyone who operates mostly in plastic.

Eaze isn’t the only business trying to capitalize on medical marijuana, however. There are plenty of others that have similar ideas and business plans. Some of the more well known include Nestdrop, Meadow, Grassp, Dave, and Canary, each of which have slightly different business models, platforms, and markets.

Moreover, that’s only considering the weed delivery industry. Other pot-based startups have already begun to try to break off chunks of what will inevitably end up being a gigantic market. For example, Privateer Holdings, based in Seattle, recently raised $75 million in funding for its many endeavors in the marijuana market. Privateer Holdings already has a hold on the Canadian medical marijuana market, and plans on “branding” marijuana to sell in the United States. One of those brands will be “Marley Natural“–based on the late Bob Marley. The business will involve his family and estate.

Now that the tide really does seem to be turning both for medical and recreational weed, it seems like there’s no good reason for funders not to back some of these projects. After all, legal marijuana has been named the fastest growing industry in the United States. A company like Eaze has the potential to become massively profitable, given the convenience of having items delivered to your door, as well as its ability to prevent any sort of “high” driving. Snoop Dogg’s investment is probably a pretty good one, and with that kind of backing, we should expect to see Eaze expand with this growing market.

Anneliese Mahoney

Anneliese Mahoney is Managing Editor at Law Street and a Connecticut transplant to Washington D.C. She has a Bachelor’s degree in International Affairs from the George Washington University, and a passion for law, politics, and social issues. Contact Anneliese at amahoney@LawStreetMedia.com.

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“UUGGHH.” That’s how Minneapolis-based street artist Eric Rieger, aka Hottea, responded to the latest indication of gentrification in New York. One-ninety Bowery has stood the test of time. The imposing six-story limestone Renaissance Revival relic has long been a cultural landmark. Built in 1899, then Germania Bank of New York City serviced its surrounding community, “Little Germany” (Kleindeutschland), once the largest German-American–then-bourgeois–enclave in the country.

In 1966, long after the bank dissolved, photographer Jay Maisel bought the abandoned edifice and converted its facilities into the largest single-family home in New York City. That was until Fall 2014, when Maisel reluctantly sold his spacious dwelling to one of the most voracious real-estate developers swallowing up NYC properties today. RFR Holdings LLC bought the property for an undisclosed price in September, valued between $35 and 70 million, with plans to flip the building, marketing it as ideal for retailing at the base with condominiums above, and offices, or even an art gallery. 

190 Bowery, courtesy of erin williamson via Flickr.

Courtesy of erin williamson via Flickr.

Should we be surprised? With the New Museum a block away, a Whole Foods Market nearby, scores of luxury apartments, boutiques, and art galleries immediately South, it was only a matter of time before 190 Bowery succumbed to SoHo, the epicenter of loft living. RFR will be responsible for the “renovation” of the building’s cultural memory, of course; developers have already issued a rendering of the facade scrubbed clean of the layers of graffiti, on which artists including Keith Haring, COST, NEKST, Shepard Fairey, and others have made their marks for the last three decades. One-ninety Bowery is “the last remaining part of ‘old New York’,” lamented Hottea. “This building is so iconic… it’s been there for years. I think it reminds a lot of people of what New York used to be, and how that’s being taken away… UUGGHH. That’s all I can say. When is it going to stop?” But such is the normal arch of the gentrification narrative, 5 Pointz being a glaring example. We should, however, be concerned with the manner in which this process is taking place.

RFR Holdings LLC was founded in 1991 by Aby Rosen and Michael Fuchs, German-born real-estate tycoons who together own 71 properties globally. Over the last year, Rosen and Fuchs have spent $250 million on Manhattan land purchases, $500 million on office building acquisitions, and nearly $150 million on retail property–a spending spree to rival that of Quicken Loans founder Dan Gilbert who now owns most the real estate in downtown Detroit. Aside from the starkly different cities in which their properties are located, Gilbert’s Rock Ventures is an American-based firm, while RFR Holdings LLC has headquarters in New York and Frankfurt. “We can buy something more expensive because we have our own capital, plus European capital that looks for longer returns,” Rosen explained in a recent New York Times interview. “We don’t have to get in and out quickly, and having this long view allows us to be more aggressive.”

Aby Rosen, courtesy of Christopher Peterson via Wikimedia.

RFR’s acquisitions represent a broad trend of foreign investment in American real estate since the late 1980s. In lieu of escrow accounts in Swiss banks and securities in the Caribbean, which have come under intense international scrutiny, foreign investors have poured their money into global real estate, which can serve as a “convenient pied-à-terre, an investment hedge against a wobbly home currency,” according to New York Magazine, “or an insurance policy—a literal refuge if things go bad.” After the U.S. housing crisis from 2007 to 2010, property values in American cities plummeted, and while the U.S. economy has been recovering, they are still relatively “low” compared to cities around the world.

The market rate for luxury apartments in Hong Kong, for instance, is between $4,100 and $5,000 per square foot; in London the same properties are valued at $3,300 to $4,100. By comparison, Manhattan properties cost half that, ranging from about $2,100 to $2,500; alas–well out of reach for even upper middle-class inhabitants, yet quite attractive for transnational ultra-rich investors. Since 2008, roughly 30 percent of condo sales in Manhattan have been to overseas addresses, or through ambiguous entities like limited-liability corporations, such as RFR Holdings LLC, which often serve as middlemen for foreign investors. Over the last decade the majority of New York property sales have gone to investors in Russia or Saudi Arabia; over the last year, however, China has spent $22 billion on New York properties–72 percent more than they spent in 2013–claiming the lion’s share of foreign investment in American real estate. “The global elite,” according to Michael Stern, owner of JDS Development Group, “is basically looking for a safe-deposit box.”

Such gentrification on the global scale should not surprise us–it is a historical trend, and the redevelopment of 190 Bowery was inevitable. But there are dangers to this phenomenon, which reach further than the displacement of middle and working class communities, and erasure of their identity and culture. There is virtually no local market for premium properties in New York City. Urban properties as investments cease to be homes. Foreign investors lack vested interest in maintaining these properties primarily because they do not live there; the American city has effectively become a place of visitors, void of close community ties and stewardship. This hollow space is lifeless. Urban properties as investments are mostly uninhabited by their affluent proprietors; they either serve as vacation homes, or remain empty retainers of wealth. Meanwhile, middle-class homes let rooms to AirBnB, and subdivide apartments as room-shares marketed at exorbitant rates on Craigslist. We are experiencing the emergence of an absentee rentier class that not only augments our urban housing crisis; this urban real-estate bubble may threaten the systemic integrity of our economy.

What needs to change? Buyers of new construction in the city often qualify for significant tax abatements–a vestige of the neoliberal initiatives of the late 1970s and early 1980s designed to increase private investment and reverse the effects of urban crisis. Moreover, entities like RFR, based in Europe with an increasing presence in New York, have capitalized on liberal transnational financial regulations. American cities must update their zoning laws, with an eye to equitable development. New York no longer needs a mainline feed of private investment to remain viable. The effects of unfettered transnational capital currents erode the fabric of urban communities. If “UUGGHH” is not a lament, it is surely an expression of our impotence.

Ryan Purcell

Ryan D. Purcell holds an MA in American History from Rutgers University where he explored the intersection between hip hop graffiti writers and art collectives on the Lower East Side. His research is based on experience working with the Newark Public Arts Project and from tagging independently throughout New Jersey and New York. Contact Ryan at staff@LawStreetMedia.com.

The post The New Urban America: Cities of Visitors and the Absentee Rentier Class appeared first on Law Street.

Chinese e-commerce giant Alibaba recently made major headlines when it decided to go public. The company’s initial public offering (IPO) went on to become the largest in history. IPOs can be complicated business, and most companies carefully deliberate before putting effort into an IPO. Read on to learn what exactly an IPO is, why companies want to go public, and what different ways there are to go about it.

What is an IPO?

An initial public offering allows a private company to become a public company. Essentially an IPO is a stock market launch where the company’s stock can be bought by the general public. Private shares of a company are sold to big investors who then sell to the general public.

A private company may have only a few shareholders. Since it is private, it is not subject to the regulations of the Securities and Exchange Commission (SEC). A public company is publicly traded and thus is subject to SEC regulation. An IPO is traditionally issued to smaller, younger companies hoping to gain capital to expand their business.

Why do companies decide to have an IPO?

IPOs are a great way for companies to quickly raise large amounts of capital to gain liquidity. This money can then be used to improve the company by reinvesting in its infrastructure or expanding the business. The major benefit to companies is that in selling shares they are never forced to repay investors the money they gain. Watch a video on some of the benefits of an IPO below:

Monetize the Investment

Many early investors or founders of a new company may be interested in cashing out their initial investment. An IPO easily allows them to do just that. The IPO provides an easy exit for angel investors or venture capitalists since they can cash out their investment by selling their shares of the company to the general public.

Increased Exposure

Going public means a company gains prestige and a better public image. Being listed in major stock exchanges such as NASDAQ or NYSE makes the public think more highly of the company and helps to garner media attention.

Benefit of Stock

Being able to offer stock gives the company options and flexibility. Employee stock ownership plans can help recruit top talent to the company. Further, the increased scrutiny that comes from SEC filings means the company can get better rates when it issues debt. Issuing debt allows the company to create other financing opportunities in the future.

What are the disadvantages of an IPO?

The immense legal, accounting, and marketing costs associated with the IPO process can be difficult for a smaller company to afford. The required time, attention, and effort of senior management take a significant toll and can hamper the company’s operations. The issuing of stock can also mean a loss of control for management, since shareholders may be given some say in the future direction of the company.

The requirement to disclose certain information in SEC filings is also a drawback for many companies. A publicly-traded company must have a board of directors and must report its financial information every quarter. This information could prove valuable to the company’s competitors.

IPOs can be risky for investors. It is tough to predict what the stock will do at the beginning of trading since there is no track record of the company to analyze. Since most IPOs are issued by companies going through rapid growth, there is a great deal of uncertainty in predicting how well the company will be doing in the future. Caution should be used when deciding whether to invest. Most experts say that small investors should wait a month or more to buy shares of an IPO so the price of the stock has time to settle down.

How does the IPO process work?

Given the concerns of going public, companies think long and hard before making the decision. The process is lengthy and very costly.

1. Once a company decides to go public, it will typically seek the assistance of an investment banking firm, such as Goldman Sachs or Morgan Stanley. The investment banking firm acts as the underwriter. Banks submit bids to companies going public with statements of how much money the company would make and what share the bank would make. This competition can be fierce, especially if banks think there is a lot of money to be made on the deal.
2. When an investment bank is hired, the company and the bank discuss how much money they will raise from the IPO, the type of securities to be issued, the price, when to bring the IPO  to market, and other details of the underwriting agreement. It is the underwriters’ job to make a large purchase of the firm and then facilitate the orderly sale of this initial stock. Underwriters make money through the fees charged to the company and by the stock they sell. The underwriter takes the risk that it will be able to sell the stock it bought from the firm for more than it initially paid.
3. The bank then puts together a registration statement called an S-1 to be filed with the SEC. This statement offers information about the company such as its past financial statements and any past legal issues. The SEC will investigate to ensure the information it receives is correct and to make sure all information has been disclosed. During this time the company will pick which stock exchange it wants its shares listed on.
4. The company will typically go on some sort of “roadshow.” It may travel to meetings across the country or online as a way to drum up investor interest in the IPO. Through attracting large investors in the roadshow, the company can then sell its stock in large blocks to institutional investors.
5. As the date of the IPO nears, the company and underwriter will agree on a price. They try to find a price low enough to generate interest yet high enough to raise money for the company. A certain percentage of shares, typically around 20 percent, are agreed to be sold. Institutional investors are often offered the first shares.
6. The underwriters sell their shares of stock to a large number of investors on the public market. The banks make their profit on the difference in price between what they paid before the IPO and what the shares sell for when officially offered to the public. Very rarely will small investors get some kind of IPO allocation. Typically they have to wait until the stock is listed on the exchange in a secondary offering. In a secondary offering, investors may sell a large block of their initial sales directly to the public.

Watch a basic overview of the IPO process below.

What are some alternative IPO methods?

There are numerous different ways of making a public offering. While most involve the basic process described above, the different methods alter specific elements of the IPO.

Venture Capital-Backed IPO

A venture capital-backed IPO is one in which management sells its shares to a group of private investors in exchange for funding and advice. This allows venture capitalists to effectively exit after creating a financially-stable company.

Reverse-Leverage Buyout

With a reverse-leverage buyout, the money made from an IPO is used to pay off debt accumulated while the company was private. By privatizing a publicly-traded firm that is undervalued on the market, the owners are able to make money once the public becomes aware of the high intrinsic value of the firm.

Dutch Auction

The idea of a Dutch auction was explored in the Google IPO. In a Dutch auction, the company reveals the amount of shares to be sold and a potential price. Investors state the number of shares they want and what price they want to pay. A minimum clearing price is determined, then investors who bid at or above that price are awarded shares. If there are more bids than available shares, the company awards a percent of shares based on the percent that was bid for. Investment banks do not typically like this arrangement since it offers equal access to shares to groups other than the underwriter. Further, if there is not strong initial demand for the shares, the auction could mean the company will not raise a lot of money through the IPO.

What are some recent examples of IPOs?

Prior to 2009, the United States was the leading issuer of IPOs in terms of total value. China has since taken the lead and become the new major IPO market. The number of IPOs is usually indicative of the health of the stock market and the economy. Most major IPOs in recent years were for technology companies.

On September 19, Chinese e-commerce giant Alibaba made its IPO debut. Trading went off without a hitch as Alibaba’s became the largest IPO ever at a whopping $25 billion. The IPO price was set at $68 a share, but shares opened more than 35 percent above the initial set price.

Facebook’s IPO in May 2012 made only $16 billion. Many cite Facebook’s mistake to be dramatically raising the price of shares and size of the IPO just before the date of the IPO. This led to rough trading and to the stock falling 50 percent in the first four months of public trading.

The recent success of Alibaba as well as other strong IPOs are seen as signals of stock market strength. Do not expect the increase in IPOs to slow down anytime soon.

Resources

Primary

CNBC: Initial Public Offering: CNBC Explains

Additional

Business Insider: The NYSE Explains How IPOs Work

The Share Centre: IPOs Explained: 10 Things You Need to Know

Business Insider: This Handy Infographic Explains How an IPO Actually Works

Wealth Lift: Initial Public Offerings Explained

Investopedia: IPO Basics: What is an IPO?

Seeking Alpha: Facebook IPO and Types of IPOs and After-Market Support

Investopedia: 5 Things to Know About the Alibaba IPO

CNBC: Alibaba IPO Biggest Ever; Shares Decline

Reference for Business: Initial Public Offerings

Mergers & Inquisitions: The Initial Public Offering Process: Got Facebook Shares?

USA Today: Why Alibaba IPO Fared Much Better than Facebook’s IPO

Alexandra Stembaugh

Alexandra Stembaugh graduated from the University of Notre Dame studying Economics and English. She plans to go on to law school in the future. Her interests include economic policy, criminal justice, and political dramas. Contact Alexandra at staff@LawStreetMedia.com.

The post The Alibaba IPO: What Does Going Public Mean? appeared first on Law Street.

Millennials seem to be constantly in the news, and when it comes to money matters that trend holds true. With high unemployment and underemployment, unprecedented levels of student debt, and the burden of supporting an aging population, Millennials face a unique set of financial challenges. Recent studies indicate that Millennials think about money differently than older generations. Are Millennials actually less financially savvy, or are they just a product of the Great Recession? Here’s what you need to know about Millennials, their approach to personal finance, and what it means for their future.

Who are the Millennials?

There is no official start and end date to the Millennial generation, but the general definition includes anyone reaching young adulthood around the year 2000. Popular studies define a Millennial as anyone born between 1978 and 1994. There are more than 80 million Millennials, which makes them the largest generational cohort in history. They comprise nearly a third of the population, and their habits are simply too influential to ignore.

Various claims about Millennials only culminate in one agreeable truth: this generation is full of contradictions. Millennials are less politically engaged, but they are interested in helping their communities and making a difference. They are more diverse and tolerant of others, but aren’t naturally trusting. They love technology, multitasking, and personal branding. Critics describe Millennials as over-confident to the point of entitlement. Millennials and their financial situation are incredibly important since they are expected to make up roughly 75 percent of the workforce by 2025. As they search for jobs following the Great Recession, Millennials are best characterized as financially risk-averse.

What is the financial situation of Millennials like?

According to Pew Research Center, the median net worth of a household of a person younger than 35 in 1984 was $12,132 in today’s dollars. Today it’s only $6,815. With less money, Millennials need to be frugal. They are keeping more cash and investing less.

Cash

According to data from Bankrate.com’s latest Financial Security Index, 39 percent of 18 to 29 year-olds choose to hold money they will not touch for at least 10 years as cash in their accounts. This is not too surprising, given that young people are historically more prone to keep money rather than invest. Millennials without jobs or 401(k) plans need to keep more money on hand for short-term needs, like paying bills. This is not just a Millennial phenomenon either. The Great Recession led people of all ages to hold more money in cash rather than make risky investments. However, some scold Millennials for their lack of interest in investment, and even describe them as the most financially conservative generation since the Great Depression.

Banking

Millennials are less likely to rely on traditional banking for their money needs. Most Millennials instead turn to newer forms of payment, such as prepaid debit cards and mobile devices. Millennials shun checks and hate paying monthly fees for things like credit cards. After growing up with one-click companies like Amazon and Apple, Millennials believe in convenience. They look for free shipping, free services, and online accessibility. According to a 2014 TD Bank Financial Education Survey, ninety percent of Millennials use online or mobile devices for everyday banking.

Following the Great Recession, Millennials are hesitant to trust big banks. Many Millennials feel that those on Wall Street do not share their values. After seeing their parents’ accounts depleted in the recent recession, Millennials continue to distrust the stock market. Wells Fargo reported that 40 percent of Millennials disagree that financial advisors have their best interests in mind.

Saving

The good news is that Millennials, if they have the capability, do try to save. On average, Millennials begin saving at age 22, in comparison to age 35 for baby boomers. The issue is that Millennials save three times as much in cash or bonds as they do in equities. Because of this, they get little return on their money. While three in five Millennials describe themselves as savers, 45 percent have not started saving for retirement. Most Millennials are more concerned about saving to weather the next financial storm than saving for their far-off retirements. According to BankRate.com, Americans age 18 to 30 are the group most likely to set aside five months’ worth of expenses in a rainy day fund.

Homeownership

Millennials are more likely than other generations to wait to buy a home. They are also more likely to live with their parents while trying to gain stable financial footing. An October 2013 Pew Research Poll showed that for the second consecutive year a record number of Millennials lived in their parents’ houses. Over 30 percent of 18 to 31 year-olds lived with their parents in 2012 and 2013. Many recent graduates return home as a way to save money and pay off student loans.

However, this lack of homeownership is not necessarily due to shaky finances–there are a couple other explanations. First, Millennials live a more transient lifestyle and are more likely to rent in big cities before settling down. Secondly, Millennials are waiting until later in life to get married and have kids. This means they are also waiting longer to buy homes equipped for family life.

What has caused Millennials’ financial distress?

Student Loans

The increasing need to take student loans to get through college cripples young adults. The burden of paying off student loans leaves Millennials pushing other goals, including investing, to the future. According to the Federal Reserve Bank of New York, the average student loan debt in 2003 was $11,000. The average class of 2014 graduate with student loans owes $33,000. After paying off loan bills, Millennials have little extra money to invest.

The debt takes a toll on Millennials’ sense of financial security. Forty-two percent of Millennials say debt is their biggest financial concern. Forty percent say their debt is “overwhelming,” compared to only 23 percent of baby boomers. Fifty-six percent of Millennials say they are living “paycheck to paycheck.” Fifty-nine percent worry they will never pay off their college loans. Click here to read an in-depth analysis of the American student loan crisis, and watch this clip for more information on student loan debt below:

NerdWallet conducted a study of Millennials’ predicted ability to retire. They found the median debt for a student at graduation to be $23,300. The standard repayment plan of 10 years would cost that student $2,858 per year. This projected debt load would then end up costing that person $115,096 by retirement, since they would miss out on their most important decade of retirement savings with the highest compounded returns.

Unemployment

The difficulties of paying back student loans are exacerbated by the fact that many Millennials spend some period of time unemployed or underemployed in the slowly-recovering job market. Young adults face a rate of unemployment twice the national average. According to a Gallup poll in 2013, only 43 percent of Americans aged 18 to 29 had full-time employment. Some of these young adults could still be in school and therefore not looking for work. However, of those with a college degree, only 65 percent had a full-time job. While the country’s unemployment rate is falling, Millennials still make up 40 percent of those who are unemployed and searching for work. Bureau of Labor Statistics data from June 2014 show the unemployment rate for those ages 18 to 29 is over 15 percent.

So, why is the Millennial financial situation so concerning?

Those in the financial industry worry about Millennials’ lack of investments. Early investment is necessary to meet retirement goals. However, many Millennials are saving in cash to build a “rainy day fund” rather than to fund their retirement still decades away. Most Millennials are aware they cannot safely count on Social Security for their retirement. However, Millennials are not saving enough to get by in retirement without Social Security.

Holding cash in a savings account currently yields negative real interest. By holding cash rather than investing it, Millennials are essentially losing money. The burdens on Millennials in terms of debt and student loans may be preventing them from investing, but financial planners worry this generation is missing out on their prime years of investment. The issue is all the more troubling because Millennials have time to take on the risks of investment since they are still decades from retirement.

Consider the following investing example involving two twin sisters posed by USA Today: one twin sister starts investing $5,000 a year in a Roth IRA at age 22, then stops at age 30 and doesn’t save any more money. The other sister also starts investing $5,000 a year, but begins at age 31 and continues every year until she is 67. With a 10 percent annual return, they both will have just under $1 million. But the sister who started early and stopped at 30 will have slightly more. With consistent returns, the first nine years end up being worth more than the next 36. Getting an early start is more important now than ever, because set pensions are nearly non-existent. Most people have to make 401(k) contributions on their own, where an employer may match a certain amount. Watch for more about retirement savings below:

There are greater concerns than Millennials’ lack of investment and retirement savings. For example, the fact that Millennials are waiting until later in life to buy homes has drawn some ire. Critics contend that Millennials are holding back the recovery in real estate because they are content to live at home rather than become homeowners. Spending on homes and greater investment would have a positive ripple effect on the economy.

Are Millennials just being ignorant?

Maybe. According to Kiplinger, nearly half of Millennials have used costly forms of non-bank borrowing, such as payday loans and pawn shops. These young people may not be aware that less expensive options are available. This lack of knowledge permeates their attitudes toward personal finance. Less than a quarter of young adults in a Kiplinger survey could answer four or five questions correctly on a basic financial literacy quiz. Specifically, Millennials struggle with the concept of mortgages, likely because many have not bought a house. Millennials also struggle with the concept of inflation, probably because they have only lived in an era when inflation has been under control. In a financial literacy assessment created by the U.S Treasury Department and Department of Education, Millennials scored only 69 percent on average. In another quiz, created by the Jumpstart Coalition for Personal Finance Literacy, the average score was just 48 percent. Watch college students answer some financial questions below:

Through both schools and their employers, Millennials are offered more financial education than other generations ever received. However, their participation rate is among the lowest of all generations. Most Millennials are simply content being frugal and trying to save what they can.

Regardless, most Millennials know they need to save for the future. The problem is their current financial situation leaves them little money to invest. They may think holding cash is the safe bet now, but any hope for a safe retirement will require greater levels of investment. The Millennial financial situation isn’t great–but hopefully they will be willing to learn.

Resources

Primary

Financial Industry Regulatory Authority: The Financial Capability of Young Adults–A Generational View

Brookings: How Millennials Could Upend Wall Street and Corporate America

Additional

TIME: Millennials are Hoarding Cash

Fortune: The Collapse of Millennial Homeownership Could be a Mirage

Vox: Why is it so Difficult to Teach People to Manage Money?

Investopedia: Money Habits of the Millennials

U.S. News & World Report: Why Aren’t Millennials Investing? Fear Isn’t the Only Factor

Kiplinger: Millennials Face Financial Hurdles

USA Today: Slow Start, Shaky Future for Millennials

U.S. Chamber of Commerce Foundation: The Millennial Generation Research Review

Nerd Wallet: 73 Will be the Retirement Norm for Millennials

Philadelphia Business Journal: Millennials are Very Conservative Investors–and Why That’s a Problem

New York Post: Frugal Millennials Save for Rainy Days: Study

Federal Reserve Bank of New York: Are Recent College Graduates Finding Good Jobs?

Gallup: In U.S., Fewer Young Adults Holding Full-Time Jobs

Wall Street Journal: Congratulations to Class of 2014, Most Indebted Ever

Editor’s Note: This post has been updated to credit select information to USA Today. 

Alexandra Stembaugh

Alexandra Stembaugh graduated from the University of Notre Dame studying Economics and English. She plans to go on to law school in the future. Her interests include economic policy, criminal justice, and political dramas. Contact Alexandra at staff@LawStreetMedia.com.

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