Millennials and Money: Why it’s difficult for us to build a financial foundation

generation debtThe draft title of this post was “It’s not your fault, really: why it’s harder than ever to get control of your finances.” It would still make a good subtitle.

I recently read the book Generation Debt: Why Now is a Terrible Time to Be Young by Anya Kamenetz (2006). The author discussed the ways government policies and business practices hurt the financial lives (present and future) of people from Generation X and Generation Y (The Millennial Generation).

According to Wikipedia, the birth years of millennials fall between the early 1980s to the early 2000s. So I guess I’m a millennial.

A few years ago I started engaging in conversations with several friends and family (mostly other millennials) about their personal finances. These conversations eventually led to more formal financial planning sessions. I’d hear all about their expenses, earnings, and financial and personal goals.

Before I started really listening to these young people about their money, I expected them to have difficulty saving money because  of overspending on luxuries, like restaurant meals, alcohol, and clothes. This is a common belief among personal finance writers and the media.

It is a good idea to take a hard look at how you can cut spending on extras, also called discretionary or variable expenses. But as I dug deeper, a lot of my friends and family were spending a greater percentage of their incomes on monthly student loan payments than on all those luxuries combined.

"It's not your fault" (really). Good Will Hunting, 1997

“It’s not your fault” (really) says Robin Williams in Good Will Hunting, 1997

The myth of the young person who spends wastefully and has no interest in saving money is harmful. It may prevent us from taking action in our own lives out of guilt or shame and also distracts from making real changes in public policy. A lot of what is ignored in today’s media is the high cost of what I call the big three: housing, health, and education. And they affect not just millennials but people in every generation. I first learned about the rising costs of the big three from the book The Two-Income Trap by Elizabeth Warren and Amelia Warren Tyagi. Here’s the breakdown:

Housing: According to the U.S. Census Bureau, the median cost of a home in the U.S. has almost doubled since 1970, from $88K to $156K to 2000 (inflation adjusted dollars to 2013). You can see from this analysis by the US Census Bureau that the rates of homeownership for all age groups (except those age 75 and older) has decreased since an average high in 2004, but the greatest decrease has been for those ages 25 to 34. Some of this decline may also be due to stricter lending standards. Renting has become much more viable to millennials. But on average, the costs of renting have risen as well:

“Based on a preliminary look at recently released Census data from the 2011 American Housing Survey, it appears the number of renter households with a severe housing cost burden has finally caught up with and may even now exceed the number of owner households with this problem. This is the result of two trends—a decrease in the homeownership rate and an increase in the share of renters with severe housing cost burdens.”

Health: According to “Since 2002, employer-sponsored health coverage for family premiums have increased by 97%, placing increasing cost burdens on employers and workers.” And health care costs are “still expected to grow faster than national income over the foreseeable future.” In other words, employee benefits are being drastically cut.

Education: College is about six times more expensive than it was 20 years ago. And it’s about three times more expensive than it was 10 years ago. According to an analysis by the National Center for Education Statistics, the costs for undergraduate tuition, room, and board at public institutions rose from 1980-81 ($2,373 per year) to 2010-11 ($13,564). The rise is similar at private institutions: from 1980-81 ($5,470) to 2010-11 ($32,026). These costs have been adjusted for inflation in 2010-11 dollars. More recent data since 2011 was not available, but I know costs have even increased since 2011. Articles like this one in the New York Times fuel the frustration that I feel when I hear older college graduates (who graduated before the 80s) describe how they worked through college, paid for it all themselves, and graduated without loans. It might have been possible then but it’s extremely difficult to do that now. And this affects every prospective or current student, graduate, and parent who wants to pay for their child’s college education.

But how about wages? Haven’t wages increased to match the increases in cost of the big three?

Take a look at this chart from the U.S. Social Security Administration. Since 1990, average wages have doubled. This sounds great, but when looked at against the big three — incomes are not keeping up with the combined rising costs of housing, health, and education.

This doesn’t mean that it’s impossible for us to build a strong financial future. It’s just that the way to get there will require a different game plan than previous generations… and millennials are already doing things differently. In a future post I’ll try to synthesize the advice I’ve read for millennials with what I know about financial planning and link it back here.


One comment

  1. […] stuck because of money. Feeling confident about starting our adult lives is hard when we know that healthcare, education, and housing costs are outpacing our incomes. So I also want to focus this blog on understanding how economic policy affects our […]

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