Last weekend Monevator linked to, and discussed, a Financial Times article on money-saving tips between a Gen X’er and a Millennial. The post got me thinking about the financial challenges facing Millennials. As I mentioned over on Monevator, I think things are financially difficult for Millenials. Unfortunately, however, that conversation then tends to go down one of two lines. Either older generations raise their arms in anger: “don’t you know how difficult it was for me!”. Or younger generations blow their lids and blame their ancestors for all their hardships.
Neither reaction is helpful in dealing with the challenges Millenials face. The reality is, blaming other people won’t make things better. Likewise, dismissing these issues means that we collectively lose out on debating how we can overcome these challenges.
As I’ve talked about before: today the greatest ever time to be alive. But, I think the important thing to remember is not that life today is not more or less difficult than before; life is different. Hardships that our parents and grandparents would suffer have evaporated away. Only to be replaced by new challenges. That means that some things that worked in the past are no longer quite as effective. We need to update the tools we use to build our financial future.
So today I’m going to look at some challenges for Millenials and they can go about making the best out of them. Now do bear in mind this isn’t exhaustive. Society is, as always, rapidly changing. I couldn’t write about every change and hope to not put you all to sleep. So there are things, that you may rightly think are missing. That’s not to say I don’t think they aren’t important. But, I’ve looked to write about some changes that are perhaps less talked about or to discuss them in a less-conventional light.
1. The death of the DB pension
Very few Millenials have the benefit of a Defined Benefit (DB) pension. Most DB schemes have been shuttered over the past 20-30 years. Replaced by a combination of employment and private Defined Contribution (DC) pensions.
The reality is, DB schemes are generally speaking much more generous than their DC counterparts. But for me, there is an even more important element in the transition from DB to DC that is overlooked. That is, in DB schemes, people were in effect outsourcing their investment and retirement planning – the pension scheme did it all for them. It was entirely possible for a steelworker to never think about saving and investing and still be sure that they would have a financially secure retirement.
With DC pensions that is not the case. It is incumbent on everyone – from Wall Street bankers through to street sweepers – to actively engage in managing their investments. Do I think that is sensible? No, it’s bloody stupid. But that is the world we are in now. That means, every Millennial should know exactly how much is going into the pension, how it’s being invested, where it’s being invested and what that means for their retirement. It means, working out if you need to be putting away more money and how that savings pot can be converted into a future income.
Once upon a time, it was fine (though highly discouraged) to have a laugh about not being ‘good with finances’. Now you cannot afford to not be ‘good with finances’.
2. The importance of capital
Capital has always been important. If you could summarise Thomas Piketty’s famous tome (with the shocking title) Capital in the Twenty-First Century in one sentence it might be: having lots of money makes it easier to have lots of money. In a way, that’s a universal truth. But we don’t have to go far back in time to when Western Governments (or autocrats) could expropriate your assets at will. Likewise, expropriation is a real threat to billions of people even today.
We needn’t travel very far to a time when many governments would pursue inflationary policies that could quickly wipe away the value of large stash of cash. Today, most modern economies have independent central banks that explicitly target managed inflation. Together, these two things mean that a pot of capital today is the more secure than at any other point in human history (although, we can never be sure that a catastrophic event is around the corner to wake us from our bliss). It also means that those who have capital now can rapidly accumulate more of it than ever.
Is that a good thing? That’ll depend on how you feel about inequality, capitalism, socialism and politics. But it’s a fact of life. So what can you do about it? Ironically, we can learn a lot from the poorest people in the world.
If you go to many ‘developing countries’ (I don’t like that phrase, but that’s for another day) you’ll often find half-built houses. The reason is not that they are too lazy to finish their homes. It’s that bricks are like a bank account. When they’ve saved enough, they buy a brick and add it to their home. They do this because a house can’t be stolen by the government or criminals nor inflated away by a dictator.
Millenials need to adopt this brick-by-brick strategy. Each month we need to squirrel away want we can. Instead of bricks, we stick the money in a brokerage account and buy a cheap global investment tracker fund. It might only be a brick at first. But one day it might become a course each month. Then maybe even a wall. Step-by-step we build our financial future. But until we start, we can never hope to finish.
3. Student loans
There’s not much debate about it: the cost of going to university has rocketed. Since I left uni nearly a decade ago, the cost has more than doubled. Graduates are left with over £50,000 of student loans (and it can be even more in the US). I’ll avoid the debate on tuition fees (at least for now). For those thinking about going to university, or for parents with children thinking about going to university, I would really encourage thinking carefully about whether it is the right thing. The math has changed. It used to be that going to uni was a ‘no-brainer’. But the equation has changed.
Firstly, student loans are an immense drag on finances. This is exasperated by being at the worst possible time (as we saw in point 2, getting capital as soon as possible is very important).
In the UK, graduates get 9% added to their marginal tax rate. It might not seem much, but it is a large amount of money to lose every month (even at the UK average, that’s 1% of earnings, and as a graduate, I’m sure you’d hope to earn more than average). If you earn less than £60,000(!) you won’t even be repaying the principal (on a debt of £50,000 under plan 2). Sure, you will have your ‘debt’ wiped after 30 years, but that is 30 years of having somewhere between 1% and 6% knocked off your savings rate. That is, putting it mildly, going to really set you back in building a savings pot.
Secondly, it is possible to pursue a number of professions without needing a university education. Taking my profession as an example (accountancy), many firms now offer school leaver programs (including one of my old employers) as well as there is a number of professional qualification paths that don’t need a £50,000 trip to a red brick. If I had one bit of career advice, it is to get a profession. Be that as a doctor, engineer, lawyer, accountant, carpenter, architect, plumber, programmer, surveyor. Most professions don’t need you to be academically minded; many don’t need a degree.
Put those two things together: uni is more expensive and it’s possible to go down your chosen career path without going to uni; it means it’s not necessarily a straight-forward choice. Going to university is still the right call for a lot of people. But it might not be for a growing part of society.
4. Winner takes all
I may be talking total nonsense, but I perceive a growing ‘winner takes all’ mentality in society. We see it in the intractable attitude of either ‘side’ in the Brexit debate or in discussing Donald Trump. One side is the winner – one is the loser. The loser needs to shut up and like it or lump it. The winner is entitled to ignore the losers grumblings.
It’s infected our workplaces – you win the rat race or you are a career failure. The days of plodding along as Joe Average are dwindling.
Of course, that’s, in many respects, a bit of hyperbole. But as sure as some days we are winners, we will be losers. We learn in both winning and losing. Listening to and learning from others is a massively under-appreciated. Just speaking from personal experience, I’ve learnt a great deal from starting this blog. Particularly, where readers have picked up on things I’ve got wrong or overlooked. It’s not really even about being right or wrong, or winning and losing. It’s about a mindset of being open to being wrong or failing. And what is more “If you can meet with Triumph and Disaster; And treat those two impostors just the same” you’ll be a man (or woman).
Over to you
What do you think are the biggest financial challenges facing Millenials? Do you agree with the challenges I’ve written about? Or do you think I’m talking utter b*llocks?
All the best,
Young FI Guy
[p.s. I would say that this to be the most difficult post to write so far on the blog. The idea started with 5 challenges and 5 opportunities. But it became clear that would be too long, so I thought I’d save the opportunities for another day. I then got really bogged down. I couldn’t even finish my ‘5th challenge’ on housing costs; I felt like I was just writing the standard tropes. Maybe I’ll revisit that particular issue in another post. I think the advice I’m setting out is still helpful – although maybe it’s a bit cliche and a bit abstract. Maybe the issue with this post is that there isn’t a clear message or theme. I know you’re probably “not meant to say this” but sorry if you read this post and think it’s sh*t.]