Millennials are highly tech-savvy, but they need to become more money-savvy if they want the financial freedom they strive for, according to recent surveys of South African millennials by two big life assurance companies.
Are you a millennial? There is some disagreement about the exact start and cut-off ages of the millennial generation (also known as Generation Y), but there is general consensus that the term applies to young people in their late teens or early 20s who are entering the job market through to those in their mid-30s, many of whom are already well established in their careers and have young families.
Much has been written about you, often with sweeping assertions about what makes you tick. What is sometimes lost is the distinction between characteristics specific to millennials and those applicable to the young generally. Rebelliousness, impulsiveness, idealism, a carefree attitude to ageing and death, a certain recklessness with money, a lack of planning for the future – these traits are shared by young people across generations.
What distinguishes you, as a millennial, from young adults of previous generations? The answer, in one word, is technology. Technology has opened up a world of information, communication and life opportunities that was not available to your parents when they were your age. Your character has been moulded by this new world.
You and your money
Your generation constitutes almost half of South Africa’s labour force. So you are a formidable group.
The established financial services industry wants your patronage, but it faces strong competition from fintech start-ups, which appeal to your tech-savvy nature.
Traditional players, such as Sanlam and Old Mutual, are researching your generation, eager to understand your money habits and finding out how best to engage with you.
The research shows that, while you may generally be better educated than your parents, you have a relatively low level of financial literacy, and are prone to getting into debt. It also shows you aren’t entirely trustful of big financial institutions, perhaps because your parents had bad experiences with such institutions.
The Old Mutual Millennial Survey, released recently, was commissioned to understand better the financial behaviour of employed millennials, versus older generations surveyed in the 2017 Old Mutual Saving and Investment Monitor.
The survey showed that an alarming 47% of millennials polled – nearly half – did not know what a unit trust was and 76% did not invest in one. However, almost 61% of them were saving money in a bank account.
Speaking at a media event highlighting the research, Elize Botha, the managing director of Old Mutual Unit Trusts, said this suggests that millennials do not understand the difference between saving and investing, which points to low financial literacy.
Another pointer was that 35% of millennials polled said they were saving to pay back debt. (In most cases, paying off debt directly is better than saving up first to pay it off, because the interest charged on debt is higher than the interest earned on savings.)
When asked what they were saving towards, travel rated highly (37%), as well as education (their children’s, 33%; their own, 31%). Under a third of them (31%) said they were saving towards retirement, but 28% said they were saving towards starting a business of their own.
Debt is a big problem among millennials, according to the Old Mutual Survey. It showed that 64% of millennials – compared with 14% among older generations – had a personal loan and 35% (versus 13%) of their income was spent on servicing the interest on debt.
Mapalo Makhu, a personal finance coach and founder of financial coaching firm Woman & Finance, also speaking at the media event, said millennials are facing unique financial challenges that makes them susceptible to debt.
“Many middle-class South African millennials are playing ‘asset catch up’ – purchasing appliances and motors vehicles on credit – while caring for financially dependent relatives (other than their children), which creates a tension between the expectations of family and the dreams millennials have for their own financial future,” Makhu says.
Says Botha: “Complete financial freedom – and the flexibility it offers us to travel, or to be our own boss – comes when the income from your assets exceeds your expenses. Only by reducing debt in tandem with investing in vehicles that include growth assets (such as listed property and equities) can millennials hope to reach this goal.”
Makhu says that unless millennials address their high levels of debt, they’ll struggle to reach their goal of financial freedom and independence.
“While not everyone aspires to building wealth, becoming financially free is achievable for most people by applying simple principles in a disciplined approach.”
Avoid these pitfalls
Botha explains the four pitfalls millennials face on their journey to financial freedom:
1. High levels of debt. Debt, typically in the form of personal loans, is often used to buy consumables. “A rule of thumb is never to spend more than you earn,” says Botha. The first step in achieving financial freedom is to apply the basic 50-30-20 rule of budgeting. “Use 50% of your salary to cover your essential expenses. Allocate 20% towards your investments and personal goals. Use the remaining 30% for flexible, or non-essential spending. However, if you’re in debt, use this money to pay off your debt as quickly as possible.”
2. Saving, rather than investing. “Unlike saving – which is setting money aside with the intention of spending it tomorrow – the second step to reach financial freedom is rather to invest and build wealth, which can ultimately supplement your income,” says Botha. She says bank accounts are not fit for this purpose. You need to invest in vehicles such as unit trusts that contain inflation-beating growth assets.
3. Keeping up with the Kardashians. The third pitfall is overspending – often utilising expensive credit – to buy the things we need “to appear successful”. “What people don’t realise is that the real secret to financial freedom is to keep your living expenses as low as possible,” says Botha. “Constantly increasing your credit limit as your income increases only serves to keep you further away from reaching your goal.”
4. Not defining your values. “Without a clear goal most people will find themselves spending rather than saving,” says Botha. “An understanding of your intrinsic values is essential to find the resolve to achieve financial freedom. When we’re working towards something that’s important to us, we’re often more willing to work harder to reach our goal.”
DON'T LET THE WORD 'RETIREMENT' PUT YOU OFF FINANCIAL PLANNING
Millennials’ eyes glaze over when you mention the word “retirement”, says Viresh Maharaj, the chief executive of client solutions at Sanlam Employee Benefits.
He says if there’s one thing that the financial services industry needs to get right for millennials, it is the preservation of retirement savings when they change jobs.
Drawing on a recent survey of millennials to augment Sanlam’s annual Benchmark Survey of employee benefits, Maharaj says: “Millennials will change jobs more often than any previous generation and are therefore exposed to the temptation of withdrawing their savings more than ever before.”
Exacerbating the problem are five distinct characteristics of millennials, Maharaj says:
They do not relate to retirement as a goal;
They distrust financial institutions;
They are highly confident in their own abilities and highly optimistic about their futures, and are thus hesitant to seek financial advice;
They have low levels of financial education and literacy relating to budgeting, managing debt and the impact of compound interest; and
They typically have not accumulated sufficient assets to be of interest to financial advisers.
This amounts to a perfect storm when it comes to their long-term savings, Maharaj says. “And they make up almost half of the membership base of South African retirement funds.”
Sanlam’s research points to a multi-pronged approach aimed at influencing millennials to make better financial decisions. This involves:
Using technology as an enabler. “In the context of money, technology is mainly used by millennials to speed up mundane transactional processes. Think eFiling, banking and transacting. In our context, technology can be used to transact, communicate and educate,” Maharaj says.
Retirement benefits counselling, which retirement funds will, by March next year, be required to provide for people changing jobs. “This presents an incredible opportunity to engage millennials proactively at certain trigger events,” Maharaj says.
Financial literacy programmes that do not undermine millennials’ self-confidence. “Millennials want to be at the centre of their life decisions. They do not want to be told what they can and cannot do. They want insight that empowers them to evaluate what is in their interests.”