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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