Millennials expect to spend more on their dog over the pet’s lifetime than they will on their own lifetime health care costs, according to findings published in a May survey from TD Ameritrade. The survey of 1,519 millennials could indicate the younger generation vastly underestimates the cost of health care in America, or the findings could reflect that millennial spending values are significantly different than those of previous generations.
[See: How to Manage Your Money in Your 20s.]
“They definitely favor experiences over material goods and services,” says Drew Jones, a registered financial consultant with the Georgia-based advisory firm The Lloyd Group, an affiliate of AE Wealth Management.
Jones doesn’t necessarily think that spending money on meals, travel and other intangibles is a bad trait or an indication of subpar financial literacy. However, failing to put money aside for retirement or delaying homeownership could have a negative impact on young adults’ finances.
Read on to discover what experts think millennials get right and where they could improve financially.
Millennials are secure in their spending decisions. While their parents and grandparents may question the financial wisdom of young adults, millennials are confident about how they manage their money. A 2017 survey of 1,000 people, commissioned by the investment firm Charles Schwab, found that 81 percent of millennial respondents were somewhat or very confident in their ability to meet financial goals. That compares to 65 percent of Gen X and 54 percent of baby boomer respondents, respectively.
However, data suggests millennials are not spending money on items that further traditional long-term goals like retirement or homeownership. For instance, the Charles Schwab survey revealed that 60 percent of millennials buy coffee that costs more than $4 per cup, 69 percent buy clothes they don’t necessarily need and 76 percent will spend money on the latest electronic gadget.
“One thing I run across with my younger clients is that they don’t know what their expenses are,” says Bryan Bibbo, a financial coach and accredited investment fiduciary with the advisor firm The JL Smith Group in Avon, Ohio. Without understanding their everyday living expenses, millennials could find themselves spending significant amounts on incidental costs.
More than a quarter of millennials spend more each month on coffee than they do on retirement savings, according to a 2018 survey of 1,000 millennials by the student loan marketplace LendEdu. The survey also found about a third of millennials spend more on clothes than retirement and nearly half of millennials reported their dining out expenses exceed the amount they put toward retirement savings.
Young adults are seeking convenience and high-end experiences. Millennial spending habits seem to focus largely on those that provide an immediate reward. “There is very much a trend toward comfort and convenience, without a doubt,” says Kelley Knutson, president of Netspend, one of the nation’s largest providers of reloadable prepaid cards.
[Read: 6 Money Management Mistakes Millennials Often Make.]
Knutson says approximately 40 percent of Netspend’s customers don’t have a primary bank account and use their reloadable card to manage their money. The company’s data shows that younger customers are more likely to buy the same products and services repeatedly, often in convenience categories. “At a high level, we’re seeing that ATM and fast food transactions decrease with age,” Knutson says.
Beau Henderson, CEO of the financial firm RichLife Advisors in Atlanta, says he sees millennial spending is also driven by a desire to have certain experiences. “Maybe a generation ago, you’d get together with your friends and have a beer,” he says. Nowadays, millennials might opt to go to upscale establishments and have expensive mixed drinks for a night out, he says.
Social media also helps drive some of that spending. Traveling to exotic places and doing things that are Instagrammable may be important to young adults who are constantly scrolling through news feeds of friends living apparently lavish lifestyles. “A lot of millennials feel pressured to keep up with their peers,” Jones says.
Homeownership is not a priority for millennials. With experiences providing more social currency than material goods among millennials, young adults seem content to pass over homeownership. Instead, they prefer to rent and pay an estimated 45 percent of their income to do so, according to an analysis of Census Bureau data by the apartment marketplace RentCafe. The rental website’s study, which was published earlier this year, looked at data from an eight-year period and included only single people who were covering the median monthly rent on their own.
“Some of it is unfortunate timing to an extent,” Henderson says. Millennials are graduating from college with student loan debt that makes it difficult to save for a down payment.
However, others see a deeper reason for millennial reluctance to buy homes. “There was tremendous psychological damage done to millennials [who were] in high school during the recent recession,” says Kevin Ortner, CEO of the property management firm Renters Warehouse. With many families losing their homes to foreclosure during that time, young adults may be wary of placing themselves at risk for a similar situation should the economy take a downturn.
Henderson and Ortner say it isn’t necessarily a negative that millennials are renting more than owning property. It’s better for them to wait until they are on solid financial ground before making that type of financial commitment. However, that doesn’t mean there isn’t a drawback. By the time they are in a position to buy, Henderson says, millennials may find they have missed the current low interest rates and end up paying significantly more for their mortgage.
Millennials need to plan for the future. Millennials’ spending priorities differ from older generations, but that doesn’t mean they’re all wrong. The problem is when young adults forget to plan ahead.
“They do have peaks and troughs in their spending and saving,” Knutson says. Being more consistent could be key to ensuring money is available for emergencies. Without cash available for unforeseen events, young people run the risk of building up credit card balances that would compound the burden they already carry from student loan debt.
Ortner also cautions that even those who aren’t sold on the idea of buying a home should give it thought as an investment vehicle. “It’s a get rich slow game, [as] I like to call it,” he says. Millennials who balk at the idea of a house payment may find buying a duplex or triplex lets them cover their payments through rental income. Ortner notes that traditional financing, including programs with minimal down payments, are available for owner-occupied buildings with fewer than four units.
[See: 15 Little Things That Impact Your Finances.]
Millennials should also ensure they are putting money into retirement savings each month. Experts recommend contributing to a 401(k) plan, if available, and putting aside the maximum amount matched by an employer. Saving for the future might seem difficult for a generation focused on memorable experiences and the present, but as Jones stresses, “Retirement will be an experience one day.”
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Do Millennials Have Their Spending Priorities All Wrong? originally appeared on usnews.com
