Why we are saving less: a millennial’s perspective
In 2016, UK households became “net borrowers” for the very first time since records began, meaning that we are now, on average, borrowing more than we are spending. In 2017, it was also announced that, on average, UK households were saving only 4.1% of their disposable income; a record low.
But why has this change come about, when we have historically been a nation of savvy savers? A quick google search will reveal many articles explaining that cheap/accessible finance, stagnant earnings and unattractive savings rates are the key drivers for this shift in behaviour. Something I find to be less commonly reported on, however, are the psychological factors leading to the changing attitudes between different generations.
Let’s take the example of the ‘Millennial’, or ‘Generation Y’ as they are less-commonly known. They are the avocado-on-toast-eating, soy-latté-drinking, Instagram generation (which I’m allowed to say as I’m technically a Millennial myself), however, they also serve as a perfect case study for the psychological shift from ‘net savers’ to ‘net borrowers’.
The advent of social media has meant that when we once compared ourselves to our neighbours, Millennials are comparing themselves to people all around the globe. Aspiring towards (what we may have previously viewed as) ‘unattainable lifestyles’ means that the dream car you were planning to buy when you retire, your 24-year-old son is now driving around at a cool £230 per month.
This is an example of the ‘present bias’ phenomenon; the psychological tendency of people to apply a greater value to payoffs that are closer to the present, when considering the trade-offs between two events. It happens to us all, however, in a world where everything is instantaneous and available at the click of a button, this becomes a more exaggerated behaviour in the younger generations. And it’s not surprising, when the closest tangible thing Millennials have to assess what value to place on “the future”, is looking at their parents…
Millennials are, broadly speaking, children of the ‘Baby Boomers’ generation; who themselves worked during a time when ‘final salary’ company pension membership was widely available, State Pension rules were (arguably) more generous, mortgage finance was easily-attainable, and interest rates offered for savings were actually greater than 2%. With limited knowledge of the current economic landscape, it could therefore be very easy for a Millennial to look at their parents and think, “they’re okay, so I will be too”; further reducing the perceived value of “saving for the future”.
The risk, of course, is that Millennials comparing the trajectory of their personal finances to that of their parents is like comparing apples and pears. The financial landscape of today is worlds apart from that described above, as industry research demonstrates:
- Although Millennials believe that their home will play a principle role in funding their retirement (The Wisdom Council, June 2018), it is expected that a third of Millennials are likely to never own a home (Resolution Foundation, April 2018).
- Research carried out by The Wisdom Council in June 2018 showed that 40% of Millennials interviewed believed that they have a ‘defined benefit’ pension, when the reality is that less than 20% benefit from an element of defined benefit pension as part of their employer’s retirement package.
- A study undertaken by the Pensions and Lifetime Savings Association (PLSA) in 2016 estimated that, unless substantial additional private savings are made, millennials are unlikely to meet their target level of income in retirement under Automatic Enrolment pension rules and the current State Pension system.
Now, this is not me saying we millennials “have it harder”. What I believe is that many of my generation have not been equipped with the tools (financial education, life experience, or otherwise) to allow us to take what we know about the current economic state of affairs, and draw meaningful conclusions about this impact this could have on our futures. We are the generation most susceptible to present bias, yet are the most lacking in the information needed to exercise ‘rational choice’.
The good thing, however, is that Millennials do want to change this. Research published by The Wisdom Council in June this year concluded that, despite significant misconceptions about savings and pensions, Millennials are hungry to gain a better understanding of the savings and investment options available to them.
Whether you are a Millennial yourself, or wanting your children (or even grandchildren) to become more engaged in your ‘financial plan’, a great starting point for this is to get in touch with a Financial Adviser.
If you would like to discuss this blog in more detail, please email Katy Allen or call 01772 821 021.
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