Why Millennials Still Don't Save Enough

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AR Images/AlamyYoung people have shown an interest in saving, but they're unable to follow through because debt is holding them back.
By Kimberly Palmer

The Great Recession handed millennials a huge lesson about money early in their careers: They saw how quickly the stock market can go south, how hard it can be to land and hold onto a job and how difficult it can be to pursue the American dream when you're drowning in debt. The results of the new 2014 Wells Fargo Millennial Study shows just how far millennials still have to go to achieve a level of financial well-being typically associated with adulthood.

While eight in 10 millennials say the recession taught them the importance of saving for the future, only 55 percent of the 1,639 millennials surveyed have actually started saving for retirement. Those who aren't yet putting money away say they think they will be able to begin doing so at age 35 -- far later than the age financial advisers recommend opening up a retirement savings account.

"They realize that the earlier they start, the more money they'll have," says Karen Wimbish, director of retail retirement at Wells Fargo (WFC). "They won't have pensions, they will probably live longer and Social Security might be a smaller part of their retirement income." But even though they grasp that reality, she says, their financial constrains make it difficult for them to actually get started doing what they know they should.

Debt is their biggest albatross. Four in 10 named debt as their top concern, and just as many said they are overwhelmed by it, compared to just 23 percent of baby boomers. Debts eat into a significant amount of monthly income, too, with credit card debt claiming 16 percent of millennials' paychecks, followed by mortgage debt (15 percent); student loan debt (12 percent); auto debt (9 percent); and medical debt (5 percent).

"For some of them, it's absolutely crushing," Wimbish says.

Medical debt, in fact, stands out as a surprising problem for millennials. Despite their youth, many have faced significant amounts of health-related costs, which continue to dog them. Gary Mottola, research director of FINRA Investor Education Foundation, says one in three millennials has unpaid medical debt, compared to 22 percent of baby boomers. Indeed, half of the 6,865 millennials in the 2012 FINRA survey​ worry that they have too much debt. "This is something that's on their minds and pervades their generation," Mottola says.

The Wells Fargo survey also found that it's those debts that are really holding them back. About half of millennials in the survey said more than half of their income goes directly toward paying off debt, and 56 percent said they are living paycheck to paycheck, unable to save for the future. Their top reasons for not saving for retirement include not having enough money to save (84 percent) and having more immediate priorities, like needing to pay off debt (77 percent).

Another problem is that their confidence in the stock market was shaken by the recession, which could hurt them over the long run, if they keep their money in safer spots that earn lower (or no) returns. Among the 1,529 baby boomers in the Wells Fargo survey, 66 percent​ say the stock market is the best place to invest, while just 59 percent of millennials are willing to say the same. Their hesitancy to invest, though, might fade with time, as we move further away from the recession: Last year, just under half of millennials were willing to call the stock market the best place to invest.

Even those who are invested in the stock marked tend to be putting their money in overly conservative spots, given their age and long time horizon. A significant number of millennials -- 30 percent -- say they have​ a quarter or less of their investments in stocks or mutual funds.

%VIRTUAL-article-sponsoredlinks%Pat​ Pearsall-Ramey​, a financial planning manager at Ernst & Young, says millennials are simply too inexperienced to know what to do with their money. "They don't know how to make investment decisions. They are new to being investors, and they overreact," she says. They might watch the news and see a worrisome story and sell their stocks, for example, whereas a more experienced investor would know that it's usually best to hold shares (within a diversified portfolio) over longer periods.

Still, as previous studies have found, Gen Yers' optimism remains strong, according to the Wells Fargo study. ​Seven in 10 said they are better off financially than their peers, which, statistically, cannot actually be true.​ A similar percentage said they expect their standard of living to exceed their parents by the time they reach retirement age. A whopping 78 percent said they are confident they could find a new, similar job within a year if they were to lose their current one. (Among baby boomers, only 58 percent said they same.)

Gen Yers' best advice to others, according to Wells Fargo, is exactly what they should be following themselves, even if they currently find themselves unable to do so: Don't spend more than you earn, get educated about your personal finances and start saving for retirement now. As they've already discovered, it's easier said than done.

Despite that reality, though, millennials are actually more satisfied with their finances than Gen Xers, a fact that Mottola attributes to ​ their financial expectations being shaped by the recession. In other words, he thinks they have lower standards.

Still, those deciding whether to pull out the plastic for another purchase or ramp up their 401(k) contribution instead might want to heed the warning of Mary Beth Franklin​, a financial industry and retirement expert: "If you save 3 percent [of your income], retirement will be a lot like college. You'll eat a lot of ramen noodles, but you won't look as cute doing it."

Kimberly Palmer is a senior editor for U.S. News Money. She is the author of the new book, "The Economy of You." You can follow her on Twitter @alphaconsumer, circle her on Google Plus or email her at kpalmer@usnews.com.

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Why Millennials Still Don't Save Enough

In investing, it's dangerous to lust after the hottest and most exciting stocks, as they're often overvalued. If a company is always in the news because of how rapidly it's growing, you're not the only one thinking of investing in it, and many others have already done so, bidding up the price. It's often better to go for boring, tried-and-true companies, such as the ones selling things we're likely to keep needing, like shampoo and electricity. Consider dividend payers, too. They may not grow as rapidly as younger, smaller, outfits, but they'll generally pay you in good times and bad. Meanwhile, it's also dangerous to lust after fancy cars and huge houses and the latest electronics, if you can't afford them.

Too much of a good thing can be a bad thing, even when it comes to money. Sure, lots of cash is good. But lots of credit cards can be bad, if they're giving you more buying power than you can afford to indulge in, and you don't have enough discipline to resist them.

Too many stocks in a portfolio can be bad, too, as you won't be able to keep up with the progress of each company, and thus might not notice when one or more of your holdings starts to become less promising. Too many cars or houses are expensive to maintain and insure. Too many pieces of clothing in a closet? You don't wear many of them, and they fall out of fashion before you can get your money's worth out of them. With many things in life, it's best to be focused.

Greed can lead us to make dumb decisions, such as jumping into an overheated stock market because we're tired of seeing other people making a lot of money on stocks. Greed can induce us to rationalize poor decisions, too. ("The market is bound to keep rising." "Let's just spend this money we inherited on travel -- we can start saving for retirement next year.")

Greed can also lead us to take high risks for unlikely high rewards -- such as when we buy lottery tickets or invest in penny stocks that are more likely to go down than up.

This sin often seems innocuous; after all, it's only making us not do things. But many times, we don't just put off an important task for a day or two -- we never get around to doing it. That kind of procrastination can be downright dangerous when it comes to personal finances.

Here are just some of the many things that we shouldn't be slothful about:

  • having a retirement plan;
  • opening and regularly funding retirement accounts,
  • researching stocks before buying them,
  • paying bills on time,
  • saving for that down payment on a home,
  • saving for Junior's college expenses, tending to our estate planning (drafting a will, durable power of attorney, living will, etc.),
  • regularly re-evaluating our portfolio to see if we need to make any changes.
Wrath can come into our financial lives when we're in relationships where both parties are not on the same page. You might be good at saving, while your spouse is "good" at spending. This can lead to one or both of you being resentful and angry. Avoid wrath: Open up the lines of communication about money early and often.

Being scammed financially can also lead to anger, and that, sadly can happen to any of us. So it's smart to get savvy about common scams and to be wary of any financial come-ons and too-good-to-be-true "opportunities. Otherwise, you're liable to end up angriest of all at yourself.
It's only natural to look at what others have and to wish for some of it. But before you start trying to keep up with the Joneses, it's worth remembering that while you might admire your neighbor's fancy new car, he may not be able to afford it either. Lots of people who seem to be doing well are actually neck-deep in credit card debt, or headed in that direction. Envy can lead you to live beyond your means, which sets you up for financial disaster.
Finally, there's pride. It's at work when we're overconfident about our investing abilities. Thinking we're investing geniuses, we might not sufficiently research a stock or investment -- or to fail to keep an eye on it after an initial bounce. Excessive pride can also lead us to buy status symbols, such as an expensive car, coat, or gigantic flat-screen TV, in order to make ourselves look good to others.
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