Why Mom and Dad’s Budget Doesn’t Fit Millennials

Student loan burdens make it difficult for millennials to build emergency savings funds and start saving for retirement. These strategies and resources can help deal with their challenges.
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young-woman-doing-billsAn important way parents can help their young adult offspring set themselves up in the world is by helping them understand the basics of managing their finances. The challenge is that parents must teach these lessons with the understanding that millennials face an entirely different set of financial realities than they encountered as young adults.

In short, the basic financial rules may not have changed from a quarter century ago, but the landscape certainly has — and that requires a new set of financial habits to address those hurdles.

The basics of household finance

When it comes to teaching your child about the basics of household finance, here are the topics every modern adult needs to understand:

  • Budgeting
  • Responsible use of credit
  • How to use different types of bank accounts
  • Building an emergency-savings fund
  • Saving for retirement

The truth is, all too many middle-aged parents these days have been less than brilliant at implementing these lessons themselves, but at least in those cases there is the potential to help young adults learn from their parents’ mistakes. However, just as millennial culture and social habits are different, millennial finances are distinctly different too. Recognizing those differences can help parents and their adult children figure out strategies for navigating today’s financial environment.

How millennial finances differ from prior generations

Here are some examples of how millennial finances often differ from those of their parents’ generation:

1. Lower incomes

Millennials have lower incomes than prior generations at a comparable age. A Federal Reserve report compared millennial finances with those of the baby boom generation (born from 1946 to 1964) and Generation X (born 1965 to 1980).

Adjusting for inflation, millennials have lower incomes than those previous generations did at similar ages and for comparable jobs. Baby boomers on average made 14 percent more money than millennials, and members of Generation X made 11 percent more. This makes it more difficult for millennials to follow the budget disciplines of saving money and staying out of debt.

>> Looking to increase your income? Read: Why Now is the Time for a Career Move

2. Soaring student-loan debt

Speaking of debt, in particular student-loan debt has caused many millennials to fall into a hole before their careers even start. According to figures compiled by Chamber of Commerce, a small-business-advocacy organization, 44.5 million Americans today owe student-loan debt totaling $1.5 trillion.

The average person who graduated in 2016 owed $37,102, a 78 percent increase in the average-student-loan-debt burden ten years earlier. What all of this means is that, because millennials make comparatively less money than their predecessors, they also have less latitude in their budgets since student-loan payments give them a significant obligation to meet every month.

3. The nature of today’s debt inhibits millennial net worth

Despite the student-loan-debt problem, millennials actually have a lower average-total-debt burden than members of Generation X did at a comparable age. The problem is the nature of that debt. Millennials have more student-loan debt and less mortgage debt than the previous generation did, which means their debt payments are not contributing toward building equity. Mortgage payments add to net worth while student-loan payments do not, which means that today’s young adults are at a disadvantage when it comes to building wealth.

Strategies for millennial finances

Here are some ways to deal with the financial conditions facing today’s young adults:

1. Minimize discretionary borrowing

It’s good that millennials are taking on less non-student-loan debt than the previous generation. With credit card, car loan and mortgage debt all at or near record levels, it’s clear that older adults haven’t always made the best borrowing decisions. Young adults could benefit from not taking on the same bad habits.

2. Use accelerated debt payments as a central budgeting technique

As burdensome as student-loan-debt payments already are, millennials should attack the problem by paying extra amounts whenever possible — even striving to set up their budgets around the assumption of making extra payments.

This could have several positive impacts. It allows the student-loan borrower to reduce the total interest paid over the life of the loan and achieve the budget flexibility of not having student-loan payments sooner. Committing to accelerated debt payments also imposes a strict budget discipline that discourages unnecessary spending.

3. Once student-loan debt is paid, use those payment amounts to catch up on saving

One benefit of devoting extra amounts to killing off student-loan debt sooner is that, once you achieve that goal, you can devote the extra room for those payments to saving for the future. This lets you start catching up on the delay in saving and building wealth caused by graduating with student-loan debt in the first place.

Conditions change over time, and each generation has to learn how to play the hand it has been dealt. That hand holds a different set of cards than the one their parents received, but it doesn’t mean parents don’t know the game well enough to help their young adult children make the best of it.

Frequently Asked Questions

Q: Will millennials ever be wealthier than their parents?

A: With a job market and economy that is especially unwelcoming to young people, millennials may seem to have the deck more stacked against them. However, they also have some advantages over the previous generation, in part by having the opportunity not to repeat their parents’ financial mistakes. Here’s a look at some of Generation Y’s disadvantages and advantages when asking whether millennials will be wealthier than their parents:

Money challenges millennials have to overcome

Here are three of the main challenges facing the current generation coming out of school:

1. Student loan debt

Concern over student loan burdens is not just youthful angst – the problem is very real. Student loan debt outstanding has doubled in just seven years, so young adults today are starting out in a bigger hole than previous generations.

Still, since most of this debt is government-backed, many of these borrowers can avail themselves of programs that limit the percentage of income they are required to pay. There is also the chance to forgive a portion of the debt after a specified period through this particular payment plan.

2. A tough job market

The headlines say that employment has improved, but that’s just not what many young adults are experiencing. They aren’t imagining the problem. Unemployment for people aged 20 to 24 is more than twice the unemployment rate for people 25 and over. To overcome this, young workers need to be flexible. Be willing to get your foot in the door where you can, rather than holding out for your dream job. Also, employment varies greatly from state to state, so be willing to relocate if necessary.

3. Slow wage growth

Even once they obtain a job, slow wage growth would seem to limit wealth potential for millennials. Even so, learn prudent money habits for making the best of what you are earning, rather than overspending the way many of your parents did. Consider putting money in a high interest savings account to build your finances.

Financial advantages millennials have over previous generations

On the other hand, here are four financial advantages young adults have over their parents:

1. Low interest rates

Since younger people have not had a chance to accumulate savings, low interest rates work to their advantage by making their debt more affordable, while older savers have seen their income plunge as a result.

2. No long-term debt addiction

Student loan debt may be a problem, but auto loan debt is also a growing issue, with outstanding loans crossing $1 trillion for the first time in 2015, according to the Federal Reserve. Student loans are a single hurdle to overcome. The older generation has built itself multiple debt hurdles.

3. Up-to-date skills

Many middle-aged workers have found the job market has passed them by. Younger people have fresher skills. As they start to gain a little experience, this will make them more competitive in the job market.

4. Time

By failing to have adequate retirement savings, the older generation has squandered much of the time it takes to accumulate wealth. Young people have the opportunity not to repeat this mistake.

In the end, building wealth depends only partly on how much money you make. Ultimately, it comes down to how much they can save and grow. The parents of millennials have largely done a lousy job of preserving their financial resources, meaning that the next generation has a very good shot at being wealthier, if they can just be smarter with their money.

More resources for millennial finances

First Job? Time for Your First Budget

How to understand credit rating reports and raise your score

Credit repair: 9 ways to rebuild credit after a mistake

More resources on bank accounts

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Compare savings accounts, money market accounts and CDs

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More resources on emergency funds

Consequences of Not Having an Emergency Fund

6 financial emergencies to prepare for

More resources on saving for retirement

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8 costly investing mistakes to avoid

How to profit from a stock market crash

About Author
Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).