Celebrate Youth Month by cracking the wealth-building code
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By Alex Cook
Data from the US Federal Reserve Bank shows that wealth is shifting slowly from the Baby Boomers and their predecessors, the Silent Generation, to Generation X and the Millennials. However, the worry is that that transfer is happening too slowly, and may point to some trouble ahead, especially for Generation X.
The Fed’s research shows that over the past 20 years, the Silent Generation’s share of all wealth has reduced from 50%to 14%, while the Boomers have retained their hold on the other 50%. Generation X has increased its share of wealth from 8% to 28%, while Millennials still control only 7.3%.
At the same time, life expectancy in the United States has increased by around 10 years over the past 50 years.
While this information refers only to the United States, we are probably safe in assuming that similar trends hold good in other, similar markets, including South Africa’s middle class.
What’s worrying here is that the Millennials and, particularly, Generation Xers seem to be lagging behind in the speed at which they are accumulating wealth. By the time that the Baby Boomers had reached the age that Generation X current is, they already controlled around 21% of wealth whereas, as we have seen, the figure for Generation X is only 7.3%.
This slow accumulation is all the more puzzling because this generation is one of the largest in terms of sheer numbers, and it’s highly paid. This is worrying because it means that the generation that is going to live the longest in history is unlikely to have the money to fund what will be a long retirement, something that raises all sorts of unwanted social consequences.
One could also perhaps speculate that the current social instability we are seeing across the developed world could be triggered by a feeling amongst younger people that they are in some way being “cheated” by the system, and are thus more open to radical change.
In my view, there are two factors that are contributing to this worryingly slow rate of wealth accumulation. The first of these is low savings rates fuelled by debt-fuelled consumerism. Generation X, and Millennials to a lesser extent, prioritise experiences over accumulation. This may seem a more enlightened view than the acquisitive mindset allegedly favoured by their parents and grandparents, but in fact it is expensive because this generation wants top quality and it wants it now.
This mindset will only be altered by a phased approach. This should begin with helping Generation Xers understand their monthly spending patterns at a highly granular level with the aim of ensuring that spending does not exceed earnings. The next step is to create and monitor a budget in order to find ways of reducing spending without affecting lifestyle.
A good budget review usually reveals unplanned and unnecessary expenditure.
Once spending is reliably reduced to below earnings, the excess can be used to pay off any debt as quickly as possible. Once debt is settled, the surplus can be saved.
It’s also worth adding that if income rises, thanks to a promotion or some other piece of good fortune, the key would be to keep the inevitable rise in the standard of living to a slower pace than the increase in savings.
Job-hopping and bad financial decisions
The second is the practice of job-hopping or, rather, cashing in pension or provident funds when moving employers, something Generation Xers do quite frequently, something that the move to the gig economy is helping to drive. The problem is not the move per se, but rather the common practice of cashing in retirement savings each time, something that has far-reaching financial ramifications:
For example, an individual who cashes out a small pension of R200 000 at the age of 30 forfeits something that would have been worth R6.5 million in 35 years’ time, at the age of 65. In other words, thanks to the power of compounding, the longer one holds an investment, the faster it grows.
The same principle, by the way, holds true for debt.
One can only imagine what will happen when Generation X inherits generational wealth from parents and grandparents. Generational wealth provides a gradually rising standard of living for those fortunate to have it, but it is the result of consistent good financial decisions across the generations. As a matter of urgency, families should get all their members involved by demonstrating the effects of good and bad financial decisions – a financial planning app like Wealthbit can be used to good effect here.
As we come to terms with lengthened lifespans, and a much more competitive work environment, it’s never been more important to make – and stick to – effective financial strategies across the generations. This Youth Month would be a great time for Generation X and Millennials to take control of their financial futures – and ensure they have the means to unlock their full potential.
Alex Cook is the CEO GCI Wealth