Millennial Mindset: Unraveling The Intricacies Of Self-Investment

Millennials, born between 1981 and 1996, are the largest generation in American history in terms of numbers. They face financial obstacles such as high student debt and stagnant wages, which have made them reluctant to invest. However, they are also the most ethnically and racially diverse generation in US history, and their values are influencing their investment choices.

Student debt and financial barriers

Millennials, born between 1981 and 1996, are the largest generation in American history in terms of numbers. They are also the most ethnically and racially diverse generation in US history. However, they face significant financial obstacles, including high levels of student debt, stagnant wages, and a volatile stock market.

Student debt is a significant burden for many millennials, with an average debt of $38,877 as of 2022. This debt, along with the fear of investing in a volatile market, contributes to millennials' conservative investing behaviour. This is further influenced by their experiences during the 2007-2009 recession and the COVID-19 pandemic, which impacted their parents' retirement plans.

The financial burden of student debt can hinder millennials' ability to complete their degrees and subsequently impacts their repayment capacity. According to a survey by The Pew Charitable Trusts, students with loans are more likely to face financial insecurity and adverse financial events, such as difficulties with housing payments. Additionally, borrowers often express concerns about their ability to complete their programs due to financial constraints. Non-completion of degrees can lead to negative repayment outcomes, such as defaulting on loans, as borrowers are left with debt but without the income returns of a higher credential.

Despite these challenges, millennials can take several steps to manage their student debt and build wealth. Refinancing loans to secure lower interest rates can reduce monthly payments and speed up debt repayment. Additionally, investing smaller amounts over a long period can be a better strategy than investing a large sum at once, taking advantage of compound interest. Exploring tax-deferred retirement accounts, such as Roth 401(k) or IRA, can also help build wealth over time.

While student debt poses financial barriers, it is not necessarily a hindrance to investing. By seeking expert advice, weighing interest rates against investment returns, and utilising new technologies and apps, millennials can navigate their financial situation and work towards their financial goals.

Career trajectories and retirement

Millennials, born between 1980/1981 and 1996, have experienced more obstacles to financial success than previous generations, including high student debt and a tough time entering the workforce. They have also witnessed economic downturns, such as the 2007-2009 recession and the COVID-19 pandemic, which have made them reluctant investors. However, despite these challenges, millennials are the nation's largest living generation and will only grow in power and influence over time.

Millennials' career trajectories are characterised by their digital savviness, entrepreneurial drive, intense curiosity, and mission to succeed. They are also known for their willingness to switch jobs, with 60% of millennials open to different job opportunities. This job-hopping behaviour can be attributed to their low engagement in the workplace, as they seek out positions that feel worthwhile.

When it comes to retirement planning, millennials face unique challenges. With retirement potentially 40 or more years away, they need to be convinced to invest early and think long-term. High-paying millennials should save a significant portion of their salary early on. Additionally, they should take advantage of tax-advantaged accounts, such as IRAs and 401(k)s, and company matches where available.

To build a robust retirement plan, millennials should:

• Fund an emergency savings account: This will provide a safety net in case of job loss or other financial crises.
• Maximise retirement account savings: By utilising tax-advantaged accounts like IRAs and 401(k)s, millennials can benefit from tax breaks and potential company matches.
• Tackle debt: Millennials often carry significant student loan debt, so it's essential to balance debt repayment with retirement savings.
• Take a long-term approach: Despite market volatility, millennials should focus on their long-term investment goals and maintain an age-appropriate asset allocation.
• Build an investment portfolio: Millennials should make stocks a large portion of their investment portfolio to reap the benefits of long-term compounding gains.
• Prepare for social security uncertainties: With concerns about Social Security benefits running out, millennials should aim for financial independence and not rely solely on social security.

Socially responsible investing

Millennials have been described as the most ethnically and racially diverse generation in U.S. history, with progressive political views and less religious observance than previous generations. They are also the first generation to come of age in the new millennium, and as such, they are considered digital natives.

Millennials have a reputation for being values-driven when it comes to their money and careers. They have spurred the growth of sustainable investing, now known as ESG (environmental, social and governance) investing, or SRI (socially responsible investing). This approach to investing has been around for years, but millennials are taking it to a new level, demanding more from corporate America and changing the playing field for all investors.

Millennials are more likely than previous generations to consider making impact investments. According to a survey, 43% of millennials would prioritize making an impact over making money, with a majority (67%) saying they would be okay with a slightly lower return if it improved social issues and company governance. This attitude is reflected in their investment choices, with human rights, the environment, and diversity being the most popular causes to invest in.

The popularity of ESG and SRI investing among millennials is having a tangible impact on businesses. Companies are starting to re-evaluate their policies and behaviours to ensure long-term success and appeal to this generation of investors. For example, Starbucks has decided to eliminate single-use plastic straws by 2020 in response to the growing concern over ocean plastic.

Millennials' interest in socially responsible investing is not just about morals; it also makes financial sense. Taking ESG factors into account when investing is a smart long-term strategy, as issues like climate change will have very real consequences for businesses and their bottom lines. As Harlin Singh, head of sustainable investments at Citi Private Bank, says, "All investors within the next couple of years will be considering, at the bare minimum, climate risks in their portfolios."

With millennials set to inherit approximately $30 trillion in the coming decades, their influence on the financial industry and corporate America is only expected to grow.

Financial planning and budgeting

Millennials have been described as the generation that faces the most uncertain economic future since the Great Depression. They have had to deal with stagnant wages, recessions, and the impact of the coronavirus pandemic on the financial and housing markets. As a result, many millennials are reluctant to invest in the stock market, despite being the nation's largest living generation. However, financial planning and budgeting can help millennials improve their financial situation and achieve their short- and long-term goals.

Budgeting

Budgeting is a process that allows individuals to manage their money by tracking income and expenses over a specific period, usually weekly or monthly. It involves allocating financial resources to cover essential living expenses such as housing, utilities, groceries, transportation, and healthcare. It also includes savings and investments. Creating a budget can help individuals identify areas where they can reduce unnecessary spending and redirect those funds towards their financial goals.

• Choose a budgeting method that suits your preferences and lifestyle, such as the envelope system, zero-based budget, or the popular 50/30/20 budget.
• Gather all your financial documents, including bank statements, pay stubs, and bills.
• Calculate your total monthly income, including any part-time jobs or additional sources of income.
• Create a list of monthly expenses, starting with the largest, such as rent or mortgage payments.
• Separate fixed expenses (rent, utilities, insurance) from variable expenses (groceries, entertainment, clothing).
• Calculate your income-to-expense ratio by subtracting total expenses from total income to understand if you have any surplus money.
• Eliminate or adjust variable expenses to increase the difference between income and expenses, allocating the surplus towards your financial goals.
• Track your spending each month to ensure you are adhering to the spending limits you have set.

Financial Planning

Financial planning is a comprehensive process that helps individuals achieve their long-term financial goals. It involves creating a strategy to reduce tax liabilities, manage debt, plan for major life events (such as weddings or having children), and prepare for retirement. A financial plan often includes details such as income, expenses, taxes, insurance, estate planning, education needs, and retirement.

• Consider hiring a financial advisor, especially if you are new to financial planning.
• Create a net worth statement to understand your current financial position, including your assets and liabilities.
• Define your financial goals, such as saving for a house, repaying student loans, or building an investment portfolio.
• Set measurable and achievable financial targets.
• Create a budget that aligns with your financial goals and allocates extra money towards them.
• Evaluate your progress towards your goals regularly (quarterly or semi-annually) and make adjustments as needed.

By combining budgeting and financial planning, millennials can take control of their financial future, reduce uncertainty, and work towards their short- and long-term goals.

Impact of parents and family

Millennials' views on investing are influenced by their parents and family in several ways. Firstly, millennials who witnessed their parents struggle financially during economic downturns, such as the 2007-2009 recession and the COVID-19 pandemic, may be more reluctant to invest due to a fear of volatility in the stock market. This is further compounded by high student debt and stagnant wages, which have made it challenging for millennials to build wealth.

However, despite these challenges, millennials are still willing to invest, especially in socially responsible and environmentally conscious initiatives. This shift in investment behaviour is driven by a desire to create positive social and environmental impact while also generating financial returns. Millennials are leveraging technology, such as social media tools and investment apps, to educate themselves and make informed investment decisions.

Millennials are also influencing their parents' and families' investment strategies. They are encouraging their elders to adopt impact investing and Environmental, Social, and Governance (ESG) investing, moving away from traditional philanthropy. This shift reflects millennials' values and their desire to address social and environmental issues.

Additionally, the prolonged period of young adulthood and increased parental involvement have influenced millennials' views on investing. Millennials often seek their parents' advice and support when making financial decisions, and this dynamic has led to greater intergenerational solidarity within families.

Frequently asked questions