Human Relations 101 teaches us that when we want to offer effective advice or suggestions, we should start by affirming the other person. So, I’ll start with a word or two of praise for the financial habits of Millennials–persons born in the period between about 1980 and 2000. Here’s the big thing Millennials are doing correctly with their finances: they are saving their money. As a matter of fact, according to the Transamerica Center for Retirement Studies, a strong majority of this generation–almost 75 percent–are actively saving for retirement at an earlier age than past generational groups. About half of Millennials are socking away 6 percent or more of their income, and those who participate in workplace retirement plans are saving closer to 7 percent. In that respect, their parents–mostly Baby Boomers–could learn a thing or two from these kids; their savings statistics are the highest of any cohort of savers since the Great Depression–and that is despite the fact that Millennials are carrying record levels of student debt.
Unfortunately, though, Millennials’ good savings habits do not carry over into their investment practices. The fact is that most of them are simply too scared of or confused about the financial markets to entrust their hard-earned savings there. This means that they tend to keep high levels of cash in bank accounts that, despite recent rises in rates by the Federal Reserve, are still earning very close to nothing. In the same Transamerica survey mentioned above, 25 percent said they were uncertain how their retirement savings were invested, and those few who were prompted to find out more reported much higher allocations to bonds, money market funds, and other low-return investments than their Boomer or Generation X counterparts.
Why are Millennials so shy of the financial markets? Part of the reason is what they have witnessed in their lifetimes, including the dot-com bust of the early 2000s and the Great Recession of 2007–09. Many of them watched their parents and older siblings suffer steep losses in investment and retirement portfolios, not to mention facing unemployment amid a job market that appeared at times to be in free fall. No wonder they associate the markets with risk and danger, rather than opportunity and long-term financial success.
How can Millennials’ perceptions of the financial markets be changed? The answer lies in two areas: education and opportunity. Principles of investing are not taught in many of today’s classrooms, but those few Millennials who do have such educational openings often report more positive attitudes toward market investments and appropriate levels of risk. This trend will need to continue over the long term for Millennials to enter the markets in significant numbers.
Second, Millennials who work for companies that offer payroll-deducted retirement plans have a great opportunity to gain the benefit of the diversification and market expertise afforded by professional managers and advisers. Because of the number of Millennials participating in the “gig economy,” outside traditional employer-employee relationships, this opportunity may take longer to develop. But because of the youth of this demographic, time is still on their side.