TOO MUCH DEBT AND NOT ENOUGH FINANCIAL LITERACY
By Chad W. Forsberg & John F. Ware, III
The Millennial generation is now more than 80 million strong and has become the largest generation in the U.S. Given the youngest members of this generation are just teens, they are going to drive the economy of Texas and the nation for the foreseeable future. In Texas, their proportion of the population exceeds the nation’s by approximately two percentage points, ranking the state No. 5 in its proportion of Millennials and making their impact is even more significant.
Today’s Millennials represent an increasing proportion of employees, homeowners, renters, taxpayers and consumers.
Edge in Education
Certainly, Millennials have some advantages compared to previous generations. Most importantly, they are better educated. In fact, according to a New York Times article, the percentage of 18- to 34-year-olds with bachelor’s degrees has increased from 15.7 percent in 1980 to 22.3 percent in 2009-2013 – and those degrees make a difference.
A 2014 Pew Research Center study compared median annual earnings of full-time workers, ages 25 to 32, in 2012 dollars between different generations and education levels. In 1965, workers with a bachelor’s degree or higher earned $38,833, while high school graduates earned $31,384. By 2013, that difference had widened significantly. Workers with a bachelor’s degree or higher earned $45,500, while high school graduates earned $28,000. Not only did the gap widen, but high school graduate earnings actually declined.
The study also showed that college graduates have slimmer chances of unemployment and living in poverty, and higher percentages are married and live independently.
Degrees Come With Debt
No doubt, Millennials’ focus on gaining a college education will benefit them greatly. Yet, debt and managing finances are the challenges that face this generation like no other. Also mentioned in the New York Times article, the proportion of bachelor’s degree recipients with college debt at graduation grew from 46 percent in 1993 to 71 percent in 2015.
Worse still, student debt correlates with a high degree of overall indebtedness. Millennial college graduates with college debt are more likely to have vehicle debt (43 vs. 27 percent for college educated without college debt) and credit card debt (60 vs. 39 percent). In fact, college-educated student debtors have a debt-to-income ratio of 205 percent versus college graduates without college debt at 108 percent, according to a Pew Research Center study.
Need for Financial Literacy
So, even though Millennials are the best educated generation this country has ever seen, they do not have adequate financial knowledge to deal with their difficult financial circumstances. In the 2012 study of more than 5,500 respondents, ages 23 to 35, by PwC and George Washington University, only 24 percent of Millennials demonstrated basic financial literacy. Other indicators of their need for better financial education from the study include:
- In the past five years, 42 percent used alternative financial services such as payday loans, pawnshops, auto title loans, tax refund advances or rent-to-own products
- Only 36 percent have a retirement account
- More than 20 percent with retirement accounts took loans or hardship withdrawals in the past year
- Only 27 percent sought professional financial advice on savings and investments within the past five years
- Only 12 percent sought professional advice on debt management
While addressing skyrocketing college expenses and the future of Social Security will be important to this generation, as business leaders and employers there are actions to be taken now to help Millennials improve their financial prospects.
Simple Steps to Improve Financial Health
First, all businesses have a relationship with a financial services provider — banks, insurance companies, retirement plan managers, accounting firms, employee benefits managers, etc. These firms have expertise and resources they can engage to help Millennial employees.
Key Program Ideas
Budgeting: The value of budget discipline is critical for Millennials who find themselves in debt and struggling to invest for retirement — and research shows they are willing make the effort. In June 2015, a T. Rowe Price study found 67 percent of Millennials will stick to a budget vs. 55% of Baby Boomers.
Employers would be wise to help educate their employees about the importance of budgeting, give them guidance on how to establish a budget and offer them tools to get started. A helpful tool is a household budget worksheet. Listing expenses and documenting where their cash goes is usually enlightening and will lead to insights about how to prioritize to pay down debt.
Financial Literacy: Understanding financial concepts for managing expenses, reducing indebtedness and saving for retirement are core to helping Millennials meet their lifestyle goals. Working with a provider to develop and deliver a financial literacy program for your employees can pay significant dividends. Millennials value businesses they feel they can trust and that understand them. Make sure literacy programs and tools are delivered in a variety of formats — face-to-face, email, applications, printed materials, WebEx, online, etc. Offering information in the way different employees like to consume it will build your credibility and encourage use and understanding.
Credit Management: Not all businesses and employers may be able to offer a holistic financial literacy program or advice. A more modest alternative may be to focus on credit counseling and retirement-planning advice. The statistics clearly show Millennials need help managing their credit, and yet only 12 percent — according to the PwC and George Washington University study — have sought professional help. Financial services providers will be eager to help employees understand credit and what products or strategies might help them improve their debt situation.
Retirement Planning: Millennials have interest in planning for the future, and they benefit from tools that help and encourage them. A Vanguard study from October 2015 shows 18-34 year olds with voluntary 401(k) enrollment participated at 60 percent, while those with automatic 401(k) enrollment participated at 87 percent. Clearly, automating the retirement savings process helps Millennials start saving for their retirement earlier.
Most businesses and employers are eager to help their employees because they feel a responsibility to them and want to see them succeed. They also realize building a positive and supportive relationship with employees helps them attract and retain the best and brightest employees in the future. Recognizing that different employees, like Millennials, have different circumstances and needs — and taking the time to understand them and support them — will help fulfill that sense of responsibility and improve employees’ chances for a brighter future.
Chad W. Forsberg is a senior vice president and financial planning strategist with BB&T Wealth in Dallas – Chad.Forsberg@BBandT.com.
John F. Ware, III, is a senior vice president and wealth regional director with BB&T Wealth in Houston. JFWare@BBandT.com.
Branch Banking & Trust (BB&T) is among the top 10 largest U.S. financial institutions and a leading middle market M&A advisor.