Financial Advice For Millennials

Recently, I had a discussion with a fellow CPA regarding giving financial advice to millennials. I mentioned using target marketing to develop strategies to better service clients. For example, the conversations with current and potential clients who are starting a business is vastly different from the conversations with clients who are gearing up for retirement. Spring-boarding off of this idea, I mentioned the potential for financial coaching to the millennial demographic. I myself feel millennials have been underserved when it comes to the promotion of financial literacy in college and in high school.

The E Word

It was at this point in our conversation when the person used the dreaded ‘E’ word. “I find millennials to be entitled and I don’t think they would take financial advice seriously,” (I’m paraphrasing, of course). I was taken aback at first, but then did some thinking – would millennials take financial advice seriously?

Being a CPA, I think I know a thing or two about personal finances. However, knowing a thing or two doesn’t mean I actually implement any of this knowledge in my everyday life. I don’t have a retirement plan, I’m probably overpaying for car insurance, my cell phone bill is comparable to a car payment, and I spend way too much money on vacations.

Am I Entitled?

Reflecting on this I wondered, “am I entitled?” If someone as financially literate as I am can’t follow the traditional financial advise then how can anyone expect any different from other millennials?

But then I thought, what if traditional financial advice doesn’t apply to millennials? What if today’s college graduates and young professionals have different wants and needs when it comes to financial planning? What if we’re not entitled but instead our voices just are not being heard?

It was at this point I decided to craft a new financial plan for millennials – one that deviated from traditional norms.

1) Prioritize Paying Debt Over Saving

Millennials face tougher hurdles in the race to financial success compared to previous generations. As of 2017, Americans owe over $1.4 trillion in student loan debt – a whopping $620 billion more than household credit card debt. In fact, the average student loan debt held by the graduating class of 2016 stands at $37,172. This equates to an average monthly student loan payment of $351.

High student loan debt is a relatively new problem. In 1970 the yearly tuition for a 4 year degree was $428 ($2,499 adjusted for inflation). This equated to 7% of the median salary for men and 20% for women. Currently this number stands at 25% of the median salary for men and 39% of median salary for women. Simply put, student loan debt is taking a bigger bite out of millennials paychecks than it did for previous generations.

Considering that the average return on a 401K in 2016 was only 5%, many millennials are skipping the retirement option and choosing to pay down their student loan debt instead. The average student loan interest rate stands in excess of 5% which can leave graduates with little to no disposable income.

2) Don’t Buy A Home

Home ownership among young adults in the US is at an all time low. Even though, according to The National Association of Realtors, housing has become more affordable in recent years. Even though this might be the case, millennials are foregoing home ownership for renting or living at home with their parents.

There are two factors that explain the decline in home ownership rates for individuals between the age of 20 to 25 – lifestyle changes and tightening credit standards. Firstly, the decision to purchase a home usually coincides with major events like getting married or having your first child. Since millennials are putting off marriage, or taking marriage off the table altogether, home ownership amongst this demographic has fallen.

Furthermore, the average cost of weddings in the United States is at an all time high. According to The Knot’s 2016 Real Weddings Study, the average cost of a wedding in 2016 was $35,329. Factoring in the cost of a wedding, the down payment needed for a home, and the already crippling burden of student debt and you find yourself with the perfect reason why millennials are not purchasing homes.

Secondly, tightening credit standards is making it harder for millennials to obtain financing. Because millennials carry higher amounts of student loan debt then previous generations, they often find it harder to obtain financing for a home. Even more so, coming up with a 20% down payment on a home is virtually impossible for this age group. To avoid these issues, millennials are favoring big cities over suburbs and find it more convenient to rent than to own property.

3) Spend Your Money On Experiences

This one has a little less to do with finances and has more to do with my own personal beliefs – but it rings true for many millennials. According to a 20-year study conducted by Dr. Thomas Gilovich, a psychology professor at Cornell University, we are happier when we spend our money on experiences rather than spending our money on objects.

Experiences develop who we are as an individual and helps us form our personal identity. We are not our possessions, but instead, we are an expression of the accumulation of our experiences.

For example, this might get a tad personal but, after graduating I spent the better part of a year watching Broadway plays (please keep your judgments to a minimum). On average I would see 2 to 3 shows per week and all I have to show for this is an endless stack of playbills. However, sadly enough, this experience has had the biggest impact on my life. I developed a passion for music, culture, and storytelling.  With this, I became proficient at navigating the NYC subway system and have sampled the best dishes the city has to offer.  Most importantly, this experience fundamentally shaped my outlook on life (you can judge me now).

Conclusion

After some thought, I realized that financial planning has little to do with what you think is best for your client. It is more important, however, to listen to their wants and needs regardless of their age. By having a complete understanding of a client’s individual story, financial planners can map out the best financial road for their client.