For every Robinhood brokerage account-holding young investor who has used newfound financial savvy to cash in on the rapid bull market and new S&P 500 record, and every highly compensated young tech worker at today's dominant companies, like newly minted $2 trillion Apple, there are likely to be many more younger Americans making little, if any, progress on their personal finances.
That's not general pessimism about the future. It's not a political statement about Wall Street being out of touch with Main Street — again. It is the conclusion a team of academic researchers specializing in financial literacy came to after pouring over a decade's worth of data covering the lack of economic progress made by younger Americans in the growth years that followed the 2008 financial crash.
And it leads the researchers to issue a warning: If the stock market gains are not short-lived, and the U.S. economy recovers its footing more strongly and quickly that many thought possible after Covid-19, we may soon see another "lost decade" for the millennial generation when it comes to decreasing debt levels, saving more, and staying away from crippling decisions like tapping retirement plans early.
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While economic experts are closely watching the current data on personal finance as a way to gauge recovery from the coronavirus crash, Annamaria Lusardi, university professor at George Washington University and the academic director of its Global Financial Literacy Excellence Center, said the more important financial data covers the full decade of 2008-2018 and Americans between the ages 18-37. It recently became available as part of a long-running study she works on, the National Financial Capability Study.
"This is more important than the latest data because this data was about a time in our economy when people were supposed to be doing very well. This decade was all expansion, and the unemployment rate came down. This is a time of boom and the stock market was roaring up," said Lusardi, lead researcher on a new paper analyzing the millennial experience during the previous boom years. "The millennial generation is incredibly important. They are already the largest and will shape our future and that's why we focus on them, and at a time of boom, this generation was doing so poorly."
The national study is conducted each three years, first in 2009 and currently with data through 2018, across a sample of 25,000 Americans.
Not a temporary financial anxiety problem
Lusardi says what is clear during the Covid crisis is that many younger Americans entered it already in a terrible financial situation, whether measured by general level of financial stress, which is an issue for millennials on a global basis, or more specific indicators like levels of debt and lack of liquidity.
"They were already financially stressed well before this crisis happened. They couldn't face a small shock let alone a big one. This is not a temporary problem, it is a structural problem and we need to use crisis to concentrate on these weaknesses," she said.Â
Sixty-three percent of younger Americans in the study said they felt stress when thinking about their finances.
Use of alternative financial services, including payday lenders, pawn shops, high-interest auto loans, rent-to-own housing finance, and reliance on tax refunds to make ends meet, all show up in the data, with 43% indicating use of high-interest loans and alternative liquidity options.
"This is not behavior on the fringes. The share of millennials using these services has increased over time. ... The numbers should have gone the other way. There is no reason why people should have been doing worse 10 years after 2009. Why are people still using a payday lender 10 years later?" she said.
Even in areas associated with good financial decisions, the portrait from the data is concerning.
Among millennials that own a home, the data shows them to be highly levered, with over 20% having taken out a home equity line of credit.
Among those with retirement accounts, over one-third (33%) tapped into those accounts early during a period of life when the focus should be on contributions, and that percentage increased throughout the decade of economic growth.
Now with the CARES Act removing penalties to withdraw retirement plan funds early, Lusardi suspects the current crisis will lead even more millennials to "effectively destroying their nest egg," she said. "It was already getting worse and it will keep getting worse over time, and we are not talking about people close to retirement. We're talking about people not even 30. ... People raid retirement accounts and we are going to push the problem down the road."
We need a wake-up call about young people ... This is the generation that will carry us forward and they need to be on a much stronger financial footing.Annamaria LusardiGeorge Washington University economics professor
There are increased levels of people with a college education, but the data shows student loans highly connected with financial anxiety — over half (51%) of millennials with loans are concerned about paying them off.
"People are starting their economic life in debt today," Lusardi said. "Student loans. If you start making late payments and take up too much debt, it can have consequences in all other financial behaviors ... paying late on credit cards and seeing a credit score decline and you're in a financial situation that continues to be worse and worse."
Over 60% of those surveyed said they incur late fees and other charges on credit cards, while 44% said they feel like they have too much debt.
Emergency savings gap
It's no surprise that millennials also are struggling to build emergency savings, a key measure of financial fragility.
Over a third (37%) in the NFCS data said they could not come up with $2,000 to meet an emergency within a month, while over half (53%) said they could not cover three months of expenses. Recent research from the Federal Reserve also highlighted the severity of this problem, with many Americans indicating they could not easily come up with even $400 for an unexpected expense.
Lusardi expects the current crisis and level of layoffs to exacerbate the challenges for Americans who lack savings and liquid assets, especially since many younger Americans work in industries hard hit by the crisis, including the service industry and tourism. One new study found close to 40% of Americans overall can't last a month on savings; 20% not even beyond two weeks.
"It is no surprise we are letting people withdraw from retirement accounts," Lusardi said. "We've gotten so used to thinking people don't have savings and we don't realize how important it is for the stability of the economy and wellbeing of people. If you look at people who do well, it is the older population, with a safe and secure income, people at the peak of wealth accumulation."
What can be done in the workplace
The millennial financial crisis is a combination of not having better options and not knowing enough about finance. While the study showed close to two-thirds convinced they had a high level of financial knowledge, it also showed a high failure rate in answering three basic financial literacy questions.
Lusardi said in every financial behavior documented in the data there is evidence of millennials exhausting all their options, as well as not knowing better ways to manage issues like debt, from credit cards to student loan balances.
"Their financial literacy is staggeringly low," she said.
While personal finance and economic education is occurring at younger ages and in more states across the U.S., one of Lusardi's chief recommendations after reviewing the data is focused on the workplace. She believes workplace education about finances will be key if we are to keep millennials from falling even further behind.
"We need a wake-up call about young people just not being on solid footing. Not having a solid financial foundation," she said. "People should have learned having watched the 2008 crisis, and should have done better. ... This is the generation that will carry us forward and they need to be on a much stronger financial footing, and we need to equip them better," Lusardi said.Â
Financial education programs tailored to the needs of young workers could play a crucial role in supporting financial decision making and helping them build financial resilience. Employers should consider implementing financial wellness programs targeted to millennial employees, she concluded in her analysis of the data and recommendations.
"Effective workplace financial wellness programs include financial checkups, accessible and customized content, and cover a broad range of personal finance topics. A financially strong and healthy workforce provides the foundation for empowered and resilient communities," Lusardi wrote.
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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.
