As we age, it is not uncommon to reflect on our successes and failures throughout our life – those involving our family, our careers, and even our financial decisions. Have we met our goals, or fallen short? Of course, nobody wakes up in the morning and declares ‘Today is the day I’m going to ruin my retirement,’ yet we see it more often than we should. Why does this happen? As many find out too late, the decisions that we make while we’re young have lasting implications and often mean the difference between financial distress and financial well-being in our later years. It’s no different for our clients.
During our youth, we naturally carry an optimism bias regarding our futures, specifically relating to the extent of our financial success. We may envision consistent wage growth and ever-increasing savings rates as we earn more. What we may underestimate is the impact that both expected and unexpected common life events can have on this success, including marriage, children, home ownership, job loss, divorce, illness, or career changes. We are wired to believe our wealth will continuously rise in a linear fashion with minimal disruption, despite observing the obstacles faced by our peers and families. When we eventually face our own unique set of challenges, it can certainly be a humbling experience.
In addition, there are powerful economic conditions that exist beyond the sphere of our own life events that have a tremendous impact on our financial opportunities. Factors that once behaved as tailwinds for previous generations’ financial success have undoubtedly become headwinds for Millennials. A few of the financially erosive economic conditions we face include rising tax and interest rates, sluggish wage growth, lower rates of return on conservative and aggressive investments, deflation of benefit programs, a tight credit market and irrational housing prices
As if this weren’t enough, add to the list the historically high levels of student debt many Millennials are now carrying.
So, it’s no surprise that the margin for financial error may be narrow compared to generations past – a sentiment we definitively agree with and have helped our clients plan for extensively. It’s extremely important that young savers seeking long-term financial security start the comprehensive planning process early in order to minimize mistakes.
The rise of the housing bubble served as a great reminder to those who are keen on motivational behavior – emotions are at the core of many important financial decisions. Most notably, we observed how few people have a productive relationship with all the variables of their financial life: income and expenses, taxes and the reduction of overall tax liability, debt management, investments, educational planning, retirement planning, estate planning, insurance, and household budgeting.
We also substantiated that while investments are certainly a piece of the overall puzzle, long-term financial success has far less to do with them specifically, and far more to do with an individual’s ability to effectively manage them in accordance with the financial variables mentioned above. The bottom line: financial success depends a whole lot more on the variables within our control than it does on those outside of our control.
The silver lining is that Millennials are an incredibly resourceful generation and seem to understand the importance of comprehensive planning. With the commodity of time on their side there are opportunities to get this right. And we’re optimistic due to the fact that many Millennials yearn to expand their foundation of financial knowledge. Every decision we make relates to our financial well-being and compounds over time. For example, the size of a mortgage at the seemingly young age of 30 directly and indirectly influences our ability to afford retirement, vacations, children, and all the other miscellaneous expenses associated with our evolving lifestyles.
As we look ahead, it’s obvious that as a generation, Millennials will need to be better planners than generations past. As a starting point, we encourage young savers to better understand their financial habits as individuals and as a household. We often begin this conversation with questions like: “How would you describe your relationship with money?” and, “What types of financial decisions are you responsible for now, and how will these change over the next 20 to 30 years?” In addition, we think it is imperative young savers acknowledge from the start that investment markets are merely a tool in the overall plan, and despite a long history, offer a future we can’t control. For this reason, it is vital that we work to understand our relationship with money, and how interconnected our financial decisions actually are.
Setting realistic goals is always important, but recognizing the behavioral habits necessary to achieve those goals is equally, if not more, important. The time to start asking questions is today, and thankfully, the next generation is getting the message.
This opinion was coauthored by Casey Snyder, a financial consultant with Wells Fargo’s Sedoric Group.