The “Better Money Habits” report of Millennial finances just released by Bank of America helps dispel prolific stereotypes that we are all foolish spenders, poor money managers, tepid by the great recession. Aside from the surprising statistic that 1-in-6 of us have over $100K in savings, I find that the data aligns well with many other surveys and common sense reasoning. I’ll highlight 401k plans, employment rates, and life event choices.
Mutual funds, ETFs, and automatic contributions to 401K accounts are by far the easiest ways to boost savings rates, especially for students just graduating from school and entering the workforce. At this point in life, we have not yet succumbed to income effects and cannot yet fathom how to spend it all. Most companies automatically enroll new employees with 3% contribution with 1% increases per year while also giving up to a 6% match. Policies vary by company, but average contribution rates hover around 4.5-5.0%, which quickly adds up over time, especially since many of us entered the workforce at the stock market’s bottom and have seen major gains.
The strong economy follows high employment rates, though this wasn’t always the case. Despite the reality of chronically high unemployment following the Great Recession, the vast majority of the economy continued to operate and thus integrate Millennials into the workforce, albeit at slightly lower starting wages. Goldman Sach’s “Millennials Infographic” reports that 75% of millennials have never been laid off, which allows for longer term accumulation of 401K contributions at higher contribution rates.
Thirdly, we have also chosen to delay major life choices such as home purchases and marriage. Some argue that this extension is a natural byproduct of longer lifespans, but whatever the case, by delaying these events which force us to adjust our finances for new lifestyles, and at times introduce shocks to savings (i.e. down payments and lavish weddings), we can preserve savings longer and continue to earn returns.
These savings account balances aren’t the full picture. For example, Millennials carry large student debt burdens which need to be paid, but it is still a better choice to have savings than to pay off student debt and have a much smaller emergency fund.
There are certainly many Millennials still struggling to make ends meet. More can be done to improve these outcomes, but many subtle social engineering efforts have been quite successful, which not only help explain the promising personal finance statistics, but also reveal how life could be much worst for many more of us. For those that worked continuously, contributed continuously to retirement and maintained simpler lifestyles, congratulations on achieving $100K of savings.