Before we begin presenting financial advice for millennials, it is important to spell out who are the millennials. Millennials are individuals who were born in and around the years 1981-1996. They have essentially grown up and matured in the new millennium. Millennials are the generation who are living in the post-industrial “new economy” which has seen many new developments in the world — some disruptive, some beneficial, and some adverse. This generation, existing in the new millennium, has seen rapid developments, ranging from technology to automotive to finance.
The Millennial Environment
Let us discuss some of the defining features of the millennial environment in terms of the advantages and challenges faced by individuals growing up in the new millennium.
Millennials have greater access to education which may be available to them in a way that they don’t have to proceed to education centers; rather, the centers of education come to them! This is because of the availability of online classes and educational material. On the other hand, the job market today has developed in a way that encourages specialization or an advanced skill set. In many instances, it means that the ordinary millennial will have to work twice as hard to get a specialized skill set and additional qualifications in order to qualify for a decent well-paying job.
A feature of the new economy is that there is more automation in the job sector. This translates to a reduction of jobs available in the market with technology replacing some types of jobs requiring less specialized skills. In a shrinking job market, it is all the more necessary for millennials to come up with higher qualifications and higher skill-set to be able to compete for the fewer jobs available.
In other words, the environment is getting tougher for everyone including millennials looking for a job in the prevailing market. Even when a job is available, it may not be a permanent job; rather, it turns out that many times, it is a job on a contractual basis with short-term prospects only.
Furthermore, in the new millennium, it has been observed that there is greater inequality with higher disparity, as compared to the previous ages, amongst the general populace. Also, there is greater competition in the business and economic world in the millennial age. A challenge in the post-industrial world of today is that social safety nets have also dwindled and a lack of available savings to take care of emergency situations and urgent healthcare needs has compounded the challenge of survival.
Another factor that has come into play in the millennial economic environment is the impact of the post-Covid challenge. In this scenario where businesses are down and industrial activity has slowed, it is important for millennials to overcome this challenge by focusing on how they will meet their financial needs and sail through these difficult times.
Of course, there are advantages, as well, of living in the millennial era. There is a greater variety of goods and services to choose from. From high-end industrial goods and luxury items to technically advanced appliances, millennials have access to refined and high-quality goods. At the same time, the rush to procure these goods and services has added to the materialism in society. The result is an increasingly consumption-based economy that is thriving not only in our country but also in most of the world. This trend chips away at funds that may well have been diverted into the much-needed savings and investment targets that millennials need to have for their present and future needs.
An advantage the millennials have is that there is greater awareness of sustainability today. With this knowledge, it is hoped that millennials will see better days in terms of environment and sustainability leading to poverty reduction, a healthy environment, and healthy societies. The UN-sponsored Sustainable Development Goals (SDGs) which were developed in 2015 include goals such as no poverty, quality education, gender equality, affordable & clean energy, and good health & well-being. The SDGs outline a broad framework of actionable targets to be achieved and reported on by individual countries to attain a sustainable and healthy life on earth. Following these SDGs will also help towards achieving better economies overall and financial soundness in the world.
These are some of the advantages and challenges faced by millennials in the millennial environment and economy. In the face of the increasing challenges faced by our society today, millennials would be well advised to gear up and be prepared for the impediments faced in the new millennium. A way to do is to save for the future and invest for their long-term betterment, before and after retirement.
Planning for the future is of utmost importance as saving today will help towards a secure future tomorrow. However, it has been observed that there is so much information available, online and otherwise, that it has led to an information overload leading to many millennials being unable to decipher which advice is sound or most suitable to their needs. Additionally, within this information overload, there is a dearth of sound advice and information available that can help them to save and invest optimally.
Sound Principles for Financial Security
In order to sift the wheat from the chaff, one must focus on some sound principles which can provide financial security when followed. But before following these sound principles, one must take an honest look at his/ her financial situation, financial constraints, risk vs. return objectives, and preferences in terms of suitable investments. Once this is done, millennials are advised to broadly employ the following key principles for greater success in their choices for financial security.
(1) Spend Less than You Earn – Budget Your Expenses:
As Pakistanis, we are culturally inclined to spend more. This attribute is more pronounced in the millennials amongst us than in the previous generation(s). From purchasing expensive cell phones to high-resolution TVs to big cars, we have a tendency to spend more and save little in order to have “bigger & better” than the rest. This pursuit to get as many consumer items is a race that makes people lose in the end than win. A winning strategy is to spend less than what you earn rather than spilling your expenditure on your credit card and personal loan(s). So it is always advisable to spend less than what you earn. In order to do so, make a financial plan listing your income and expenditures, and budget your expenses and costs for every month. Accordingly, trim down on what are your greatest expenses so you can have enough funds left over to spend on other items and needs. One should try to exercise self-control and limit extra expenses such as eating out often or buying that expensive perfume for example. In the long run, it is self-control, budgeting, and financial planning which is the easiest way towards building financial security for the future. By spending less than your income, you will be saving some amount which can be well invested in mutual funds or stocks to earn returns and payouts, which when compounded can earn you a lot more than what you started off with, in a number of years. Therefore, the best way forward is to spend a bit less than what you earn, save a little every month, and invest the same for your future security. For example, you can save 20% of your income every month and keep that aside for investment and emergency funds, etc.
(2) Avoid Debt at all Costs:
Spending on your credit card or utilizing a personal loan eats into your future earnings. Therefore, this type of debt must always be avoided.
While debt should be avoided at all costs, taking on one type of debt may well be justified. This is the type of debt that helps acquire an appreciating asset or creates value. An example of this type of debt is taking a mortgage to buy a home or some other property or asset. Of course, on the other hand, taking on debt to buy expensive goods and luxury items which depreciate in value over time, is the kind of debt that must be avoided at all costs.
Taking on debt incurs extra expenses in the form of interest and other costs which make us pay far more than the actual cost of the item(s) purchased, especially if the payment to clear the debt is made over a longer period of time.
(3) Prioritising Financial Goals:
It is important to list and prioritize your financial goals. Outlining your broad objectives such as saving for retirement, paying off debt, paying for health insurance, or saving for emergency funds is a useful idea. Saving for these objectives should be a priority. For example, saving for emergency funds should be of utmost importance because, in case of an emergency, a millennial might end up spending for medical care through his credit card or may even have to sell some asset like property in the worst possible scenario. To avoid this difficult situation, it is advisable to start saving a part of your salary every month to arrange for your emergency fund.
(4) Start Early and Save Regularly:
Given the need for financial security and the conflicting attraction to spend more, it is advisable that millennials get a head-start by saving early and regularly. Millennials need to start early and save at least 15-20% of their income in order to be prepared for expenses that would be incurred in the future and also for investments. The expenses could be health costs, education expenses, and post-retirement expenses, amongst others.
There are numerous avenues where millennials can invest their funds such as mutual funds, Govt. bonds, Term Finance Certificates (TFCs), and the stock market. Depending on their risk vs. return objectives, financial range & constraints, and investment preferences, millennials can invest in different types of stocks, Exchange Traded Funds (ETFs), or mutual funds as per their suitability. Investing in ETFs may be a good way forward for millennials as it’s a relatively low-cost, diversified, and less time-consuming (from a research perspective) avenue of investment that can be invested in through the stock market.
As one grows in age, one tends to become less risk averse and is focused on investing in asset classes that provide for a stable return. On the other hand, when one is young, one has the cushion of support from parents, family, job, or other sources, and can invest in asset classes that do have a higher element of risk involved, thereby generating higher returns. So one is better placed to invest aggressively in the earlier years of our youth than in the later years.
Millennials can also reap the benefits of compounding by investing in the stock market. Compounding is the process in which earnings from an asset, such as capital gains, dividends, or interest, are reinvested to generate additional earnings over time. In fact, it is highly recommended for millennials to invest early as time is on their side whereby they can take advantage of compounding and earn substantial gains over the long term.
The importance of starting early and saving regularly to invest cannot be emphasized enough. We take the example of Amir and Asif, where Amir invests Rs 50,000/- every year from age 19 to 26 and doesn’t invest again. On the other hand, Asif invests the same Rs 50,000/- yearly from age 25 to 45. Assuming a 10% rate of return, note their ending balances:
|19||Rs 50,000||Rs 55,000||19||0||0|
|20||Rs 50,000||Rs 115,000||20||0||0|
|21||Rs 50,000||Rs 182,050||21||0||0|
|22||Rs 50,000||Rs 255,255||22||0||0|
|23||Rs 50,000||Rs 335,781||23||0||0|
|24||Rs 50,000||Rs 424,359||24||0||0|
|25||Rs 50,000||Rs 521,794||25||0||0|
|26||Rs 50,000||Rs 628,974||26||0||0|
|27||0||Rs 691,871||27||Rs 50,000||Rs 55,000|
|28||0||Rs 761,058||28||Rs 50,000||Rs 115,500|
|29||0||Rs 837,164||29||Rs 50,000||Rs 182,050|
|30||0||Rs 920,881||30||Rs 50,000||Rs 255,255|
|31||0||Rs 1,012,969||31||Rs 50,000||Rs 335,781|
|32||0||Rs 1,114,266||32||Rs 50,000||Rs 424,359|
|33||0||Rs 1,225,692||33||Rs 50,000||Rs 521,794|
|34||0||Rs 1,348,261||34||Rs 50,000||Rs 628,974|
|35||0||Rs 1,483,087||35||Rs 50,000||Rs 746,871|
|36||0||Rs 1,631,396||36||Rs 50,000||Rs 876,558|
|37||0||Rs 1,794,536||37||Rs 50,000||Rs 1,019,214|
|38||0||Rs 1,973,989||38||Rs 50,000||Rs 1,176,136|
|39||0||Rs 2,171,388||39||Rs 50,000||Rs 1,348,749|
|40||0||Rs 2,388,527||40||Rs 50,000||Rs 1,538,624|
|41||0||Rs 2,627,380||41||Rs 50,000||Rs 1,747,486|
|42||0||Rs 2,890,118||42||Rs 50,000||Rs 1,977,235|
|43||0||Rs 3,179,130||43||Rs 50,000||Rs 2,229,959|
|44||0||Rs 3,497,043||44||Rs 50,000||Rs 2,507,955|
|45||0||Rs 3,846,747||45||Rs 50,000||Rs 2,813,750|
There are several challenges faced by millennials that are unlike those faced by previous generations. With technology and automation obsolescing many traditional jobs, the job market has actually shrunk and will possibly continue to shrink in the near future as well. In the coming years and decades, it is likely that there will be tougher economic times with growing competition, smaller job markets, and an increased supply of professionals in the job market. In such a situation, it is imperative for the millennial generation to start early, save and invest in order to secure their future and attain financial independence.
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