Overcoming the Get-it-now, Pay-For-It-Later Mind-Set That Has Permeated The Nations Young

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This post’s title was drawn from a recent USA today article which looked at the debt issue plaguing our younger (“Y”) generation (20′s to 30′s) Interestingly, while the recession exacerbated their financial issues the cause is much more due to Generation Y’s mindset and poor personal finance habits. There were some startling statistics from the article:

~ About 37% of 18- to 29-year-olds have been underemployed or out of work during the recession, the highest share among the age group in more than three decades, according to a Pew Research Center study released in February. The unemployment rate for Gen Y remains much higher than the national rate. In March, the national rate was 9.7%, compared with 18.8% for workers younger than 25, according to the Bureau of Labor Statistics.

~ This generation is the least likely of any to be covered by health insurance. Just 61% say they were covered by some form of a health plan, the Pew study said.

~ Only 58% pay monthly bills on time, a National Foundation for Credit Counseling (NFCC) 2010 survey said.

~ 60% of workers 20 to 29 years old cashed out their 401(k) retirement plans – typically a big financial no-no because such a move squanders retirement assets and forces the recipient to pay a tax penalty – when they changed or lost jobs, an October study by Hewitt Associates said.

~ Nearly 70% of Gen Y members are not building up a cash cushion, and 43% are amassing too much credit card debt, says a November MetLife poll.

~ On average, Gen Yers each have more than three credit cards, and 20% carry a balance of more than $10,000, according to Fidelity Investments.

~ Millennials are graduating from college with an average of $23,200 in student debt, according to the most recent data from the Project on Student Debt. That is a 24% increase from 2004.

“They have high, unrealistic expectations,” says Lee Jenkins, author of Lee Jenkins on Money and a managing partner of Atlanta Capital Group in Atlanta. “And many of them don’t manage money very well.” “Many of them are willing to buy now and pay later,” says Ashley Adami, a financial planner for ClearPoint Credit Counseling Solutions in Seattle. She not only has Gen Y clients, she is a Gen Y member. A common trait within members of the generation is a belief that they have the skills and ability to make money and afford large purchases, even when it doesn’t appear that they do.

 

How To Address and Change This Mindset

Even the though the above statistics are for generation Y, these behaviors are prevalent amongst all age groups in the economy today. While the solution to dealing with the above issues requires simple common sense good personal finance habits, actually implementing the strategy takes time, discipline and some serious commitment. Furthermore, earning more money will not break the debt cycle. Instead it will make the issues bigger as people feel free to spend more since they feel they are earning more. Controlling your finances and changing fundamental personal finance habits is the only way to get back on the real road to financial prosperity. Here are just three simple, but highly effective ideas to get you going:

1. Automatic Saving. The best way to save money is to do so before you can spend it. Doing if pre-tax into a retirement amount is the most tax efficient way to save. If you still want easy access to your funds then setup an automatic deduction directly when you get paid.

Given the huge tax advantages of retirement accounts, and potential employer matching (i.e. free money), it is a sin not to invest in your 401K or IRA if you can afford to. If you are contributing to your 401K, then try and get to the maximum limit. The earlier you start, the better thanks to the power of compounding.  For effective post-tax saving, set up an automatic deduction to a high yield savings account when you get paid. Aim to save 10%, with every paycheck. 

2. Get Educated. The most valuable and permanent asset is education and when it comes to personal finances, financial literacy equals financial freedom. By understanding how banks, lenders and investment firms make money off of us we can turn the tables and find ways to minimize the money we pay them (and even make some back!). The best way to improve your financial knowledge is subscribe to some of the personal finance publications like the Wall Street Journal and Money Magazine. A couple of popular personal finance and investing books worth adding to your reading list are The Total Money Makeover (from personal finance guru Dave Ramsey) and the classic The Intelligent Investor by Benjamin Graham. Off course, there are also a ton of great personal finance blogs out there to help you with your personal finances.

3. Learn to Budget. Most Gen Y’s have never kept a budget before because there has never been a need. However in the face of adverse financial situations a keeping a budget is essential. Budgeting will help you keep track of your expenses and give you an idea of on what and where you are spending money. A budget should be simple and primarily consist of tracking 2 things – money coming in (income) versus spending (expenses). The easiest way to do all this is in an Excel spreadsheet and use color coding to indicate how an expense was paid for. See this article for more on how I set up a budget in Excel. Keeping and sticking to your budget will be challenging and it is okay to expect variances as you get used it. However, once you master it and effectively use your savings for investing, you will financially set yourself ahead of most other people for the rest of your life.

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{ 1 comment… read it below or add one }

Aury (Thunderdrake) May 21, 2010 at 1:22 am

With all the scares I’ve been hearing going around with the 401K and the failure of those plans, inadvertently caused by Generation Y, I would consider cashing out the 401K early to be a rather wise move. Even if accidental. But like most, they would probably fritter it on some doodad or something that puts them into debt, like a car. A sad, common truth.

Personally, if I had a 401k, I’d cash that in right away and have stocks in my own name. Preferably in a tax haven. Most retirement plans unfortunately, are not that. In Canada, we got a TSFA to protect all capital gains, however.

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