Generation "Y": How To Help Our Children Achieve Financial Independence
It's pretty clear that young people are facing a lot of things that our parents didn't[including] student loan debt and very low job placement rates among recent grads. That's a pretty devastating combination," says Zac Bissonnette, recent college graduate and author of How to Be Richer, Smarter, and Better-Looking Than Your Parents, a popular and well-received new personal finance book for young people.
I cut this quote of Bissonnettes from an article published in US News & World Report magazine in March 2012, knowing that having addressed this issue with my own children for years, it would become a very important topic for other parents and their children.
Indeed, according to a recent survey by the Pew Research Center, half of young adults between the ages of 18 and 34 have taken jobs they don't want just to pay bills, and almost 1 in 3 has delayed marriage or parenthood because of the economy. Most of the statistics cited in the survey are not too surprising, however a few are eye opening even in todays current economic climate. While a similar survey approximately 10 years ago found that most parents (80 percent) had expected their children to be financially independent by age 22, this most recent survey revealed that expectation had risen to age 25. As reality sinks in, economists expect that we will see that number rise to age 30.
Many young people continue to flail in the labor market, which often means they also have a hard time saving money, paying off loans, and meeting other financial goals, such as buying their first home or living independently from their parents. One of the best defenses against this scenario is to remain debt free. This is easier said than done, however, with the level of college loan debt at record highs of $1 trillion. Yet, what many young people seem to lose sight of is the fact that they dont need to add to that dilemma. Many graduates who land their first job immediately buy a new car and get swallowed up in 5 years of monthly payments that often feel like a strangle hold as they try to cope with the expenses of real necessities. With these types of common scenarios in mind, I want to review five major categories of financial concern facing Generation Y, and provide some ideas on how to most practically approach each of these
This is not the first recession faced by young peopleand it will not be the last. When I graduated from university and entered the job market in the early 70s, there were tens of thousands of GIs returning from Vietnam, and we were all looking for the same jobs. We have faced other major slowdowns in economic activity during 1980, 1992 and 2001, yet Americans did not seem to learn much about remaining recession proof from these hard times. The chart below from the U.S. Department of Commerce tracks US personal savings rates from the late 1950s onward. As you can see, for a brief period between the mid-70s and the mid-80s, Americans actually saved better than 10 percent of their incomes. However, in recent years, this rate plummeted to reach an all time low as we entered the current recession. You will notice a spike in the savings rate during 2010 as people were really fearful of what was ahead and reacted briefly. However, recent months have once again shown a downward trend in savings rates for Americans. Also, before we get too excited that we once were able to save 10 percent or more of our income, we should look at Japan, India, and China which have savings rates today of 22, 33, and 35 percent respectively!
The strong emphasis of importance I place on savings is simple: it is the fundamental foundation for financial independence and something that each and every one of us can teach our children whether they are age 2 or 22; it is never too early or too late. The easiest approach to savings is to commit a fixed portion of every paycheck to savings in a disciplined way--meaning no ifs, ands or buts about it. The vast majority of those who lost their homes during this current recession had little or no savings to help weather the storm.
In search of financial security we need to have a deep respect for debt. Debt may easily be considered a "necessary evil," especially to those just starting out who have certain needs and wants. The key to this ingredient is the ability to discern "needs" from "wants" and to use debt accordingly. Many are already burdened with student loan debt upon graduationwhy add such things as a new car payment, wide screen TV, and the newest high powered computer or notebook to the mix? I was asked at one presentation, "Why would you hold off on buying a new car, you have to get to work somehow if you are lucky enough to get a job?" There is a very easy answer to this question: if there is not convenient and low cost public transportation to your job, you will need a car. However, here is one place where it becomes important to objectively balance "needs" versus "wants". There is a huge spread between a $3,500 used car and a $35,000 brand new car. Yes, you need to shop smart and you need to be vigilant on the maintenance and upkeep; yet such a choice will make an immense difference on your trek toward financial security.
This ingredient is often the most overlooked and yet not having adequate insurance poses possibly the greatest threat to financial security. There have been some recent changes in Federal law ruling that health insurance companies must allow parents with full family coverage to carry their children on the same policy until the age of 26. This is really big, as it affects everyone. My eldest two sons were fortunate enough to find jobs reasonably soon after graduation. However, in both instances, health insurance coverage with their new employers did not start immediately. They were each required to meet some probationary period successfully (this can be up to one year), before receiving health insurance as a benefit.
There is little need for much discussion here as the costs of an extended illness or injury have bankrupted many. If you are not able to carry your son or daughter on a policy you have, it may be well worth your investment in helping them to acquire even some catastrophic coverage that will protect the family from being financially wiped out should they have the misfortune of a serious illness or injury.
Here again, there are choices to be made: living at home for a while, renting an apartment, or buying that first home. My experience has been that while most young people can't wait to get their first apartment, with or without roommates, chances are they would be much better off continuing to live with mom and dad for a short time, if at all possible. There was a rule of thumb back in my parents' day that your housing costs should not exceed 25 percent of your take-home pay per month. This rule went out the window in the 80s and 90s as people regularly spent north of 50 percent of their take-home pay for housing. When you consider that this percentage includes large numbers of two-income families, you quickly see that housing costs can be a serious impediment to financial security, especially when one wage earner gets laid off or loses a job.
Encourage common sense when it comes to housing: living at home in order to save up a few months salary before embarking on your quest for housing may be the best choice for many in today's market.
Lastly, it is important to keep a good perspective on education. If someone left college before earning a degree, it is imperative that they consider finishing to improve their chances at financial security. If your degree is not something readily marketable in today's job market, it may be worthwhile considering a second degree, or at least some specific training in an area of interest where jobs are available. If you are fortunate enough to have a job with an employer who offers ongoing education benefits, it is a good idea to take advantage of the opportunity, especially if you enjoy the field of employment. There are countless examples where promotions are given to the person with the best experience; however when two candidates are similarly qualified, the next differentiating factor is education.
In summary, today's Generation Y certainly faces many obstacles on the path to achieving financial security; however, with an awareness of how making good decisions along the way can help better secure financial wellbeing for the future, and an eye toward the key ingredients discussed, the challenge can be better met.
©Patrick J. Catania 2012
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.
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