Conor Richardson

5 Reasons Millennials Control The Future Of Money

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Over the past decade, there has been a shift in the way older generations view Millennials. Initially cast as egocentric, spoiled, and over trophied, it seems the matriculation of Millennials into the workforce has assuaged these initial fears. Plus, academic research shows that Millennials are not that different from their older baby boomer parents. However, there is one element that sets Millennials apart from older generations. Money. While Millennials don’t have a ton of money right now, a historical shift is about to occur. The shift will leave Millennials as the global guardians of capital. This places Millennials at the helm of controlling global wealth. With this control, will come a change in how money is managed. Here are five reasons that Millennials stand to control the future of money.

1. Millennials are about to receive a massive transfer of wealth.

Millennials stand as benefactors to one of the largest intergenerational wealth transfers in history. According to a Boston Consulting Group analysis, in 2015 Millennials were estimated to control roughly 17 trillion dollars of wealth. This is expected to increase dramatically by 2020, as Deloitte has projected that number to rise to 24 trillion dollars. Those are massive numbers!

This transfer of capital will take place in various forms – gifts, changes in business control, inheritance, investment transfers and more. Millennials will soon be responsible for a significant piece of global wealth and that means a change to how wealth is managed.

2. Millennials are digital natives.

To start with, Millennials are technologically savvy. Originally dubbed digital natives by Marc Prensky, a Harvard MBA and author, Millennials, or anyone currently between the ages of 19 and 35, came of age during the technological boom of the early 2000s. And as a result, technology is second nature to them.

As a generation, over 90% of Millennials check their mobile device within 15 minutes of waking up. It is fair to say that technology is ubiquitous in their daily lives. This means that they have become accustomed to sharing personal photos and opinions on Instagram and Facebook, and they are equally comfortable linking private information, such as bank account details, to mobile apps like Venmo or Paypal.

3. Millennials are comfortable sharing data.

Millennials feel safe sharing their personal data because as digital natives, Millennials are incredibly comfortable navigating complex technology and understand the value that technology can play in their daily lives. As a result, they show a greater propensity to share personal information such as age, location, income, or birthdates. The caveat to this exposure is that Millennials expect an advantage in sharing this data. Specifically, they expect fast, efficient, and reliable service and advice.

This expectation manifests itself in a survey showing that 57% of Millennials are prepared to share their detailed savings plans and targets with others because they perceive that doing so would offer a more tailored approach to reaching their financial goals. This openness affects their interaction with online businesses, and Millennials have come to expect a wider and more tailored choice of content.

4. Millennials will use Capital for more social good.

With the proliferation of technology, Millennials have become more mindful of global issues such as poverty and human rights violations. This increased exposure has lead Millennials to become hyper aware of the benefits of using capital for social good. Additionally, they expect businesses to give back to their communities and act in a socially and environmentally responsible manner. This relatively new concept means corporate behavior will have an impact on Millennials investment decisions. Those under 35 are twice as likely to sell an investment if they perceive a display of poor corporate behavior. And over 87% of Millennials believe that corporate success should be measured by more than just financial performance.

This means that we are entering a new era of corporate responsibility and Millennials aren’t afraid to put their money behind their beliefs, or tell their robo-advisor to do so.

5. Millennials will set a new course for money management.

Robo-advising is a relatively new way wealth managers have removed the initial hurdles of investing and mastering the basics of personal finance for the Millennial generation. Business is booming for companies like Wealthfront, Betterment, and Personal Capital who have tapped into the underserved and technological savvy Millennial wealth management market by providing an investment management experience that occurs predominately online. Armed with superior technology and proprietary algorithms, these companies have digitally streamlined the investment, portfolio allocation, and wealth management process.

It comes as no surprise that robo-advisors have become the new craze in Millennial money management. Millennials have observed the costs of the old way of managing money, face-to-face meetings and high fees, but don’t see the benefits. This has created a void, and Millennials once again looked to technology for the solution. And it delivered. With relatively low costs and leveraged technology, it looks like robo-advising is here to stay.

Millennials are in control of the future of money, whether older generations like it or not. Armed with the knowledge that a massive transfer of wealth is about to occur, Millennials need to prepare themselves for this new found responsibility by increasing their knowledge about personal finance now in order to effectively manage the tide to come. With education and practice, they will be able to rely on their digital savviness to master money in a fresh and exciting new way. By doing this, Millennials will control the future of money.

Jonah Berger, Prospect Theory, and Large Numbers

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“If something is built to show, it’s built to grow.” – Jonah Berger

When a marketing professor from the Wharton Business School writes a book on making things catch on, you read it. In his New York Times best-selling book, Contagious, Jonah Berger explores why things catch on. For more than a decade, Berger has been researching why certain products sell more than others and why some products leave behavioral residue while others immediately leave our thoughts. Berger claims that “Virality isn’t born, it’s made.”

In Contagious, Berger introduces Daniel Kahneman, a Nobel Prize winner in Economics, who is famous for his research on a concept called “prospect theory”. Simply put, prospect theory is the idea that the way people actually make decisions is different from how they should make decisions. While this may seem intuitive to some, it runs juxtapose to key assumptions in economics. One of the basic assumptions of economics is that people make decisions that are rational and optimal. In contrast to this, Kahneman’s prospect theory suggests that we often do the exact opposite.

In fact, his theory becomes amplified when we are dealing with large numbers and high dollar purchases (think car or home purchase). What we know from Kahneman’s research is that people do not always evaluate things in absolute terms. Here is an example. Let’s say you are in the market to buy a new alarm clock. You walk into a store and are about to buy the perfect alarm clock for $35. Right before you swipe your card someone in line tells you that you can buy the same alarm clock for only $20 if you go to a store right down the street. What would you do? Most people would immediately head to the other store. Now, let’s say you were at Costco about to buy a $700 TV. But right before you swipe your card, someone tells you that you can buy the same TV for only $685 if you go to a store right down the street. What would you do? Most people would proceed with their check out at Costco. In other words, forego the $15 in savings. But why does our behavior differ over the same $15 in absolute savings? Because how we actually make decisions about purchases is not always economically optimal, even when the absolute dollars are the same.

One of the key messages from Kahneman’s research is that people don’t always think about purchases in absolute terms ($15) but rather we evaluate purchases by a “reference point”. In both scenarios described above, the reference point is zero dollars. But the further away we get from zero, the less inclined we are to feel the impact of absolute dollars. The $15 seems more significant savings when purchasing a $35 alarm clock. But not so much when purchasing a $700 TV.

This is why people get into trouble when it comes to big purchases. We tend to lose sight of absolute terms. For example, if you are looking to buy a house, and are mentally prepared to spend $200,000 (roughly the national average) to purchase the house, sliding several thousand dollars up in price becomes less painful. At the end of the day, what’s really the difference between $200,000 and $240,000? When signing for the mortgage, it won’t feel like that much. But in absolute terms, you are spending a difference of $40,000!  As a stand-alone number, $40,000 becomes more pronounced. In order to protect yourself from your natural inclination to purchase more than you should, it is imperative to create budgets and stick to them. Decide what you are going to pay before you walk into any major purchase and use prospect theory to your advantage.

As professor Berger points out, “Practical value is about helping.” If we arm ourselves with knowledge about how we actually make purchases, perhaps we can make better decisions and spread the word along the way.

 

Top 5 Cities For Paying Off Student Loans

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Where you live matters. Not only does it affect your daily life, where you grab a coffee or your daily commute, but it also influences your personal finances. This is especially true if you are trying to become debt free. If you are aiming to eliminate debt fast – credit card debt, student loans, or auto loans – then the city you live in can have a tremendous impact on your ability to pay it off quickly (especially for student loans).

A recent survey, by my friends over at Credible, shows the top five best and worst cities to live in for paying off student loan debt.

Top 5 Best Cities:

1) Dallas, TX

2) Jacksonville, FL

3) Houston, TX

4) Columbus, OH

5) Austin, TX

Based on the nearly 9,000 survey participants, Credible has determined these cities are the best places to live for paying off student loan debt due to their low debt to income ratio and low cost of living.

If you can combine this geographical arbitrage with socioeconomic downsizing, then you have the potential to dramatically improve your financial health. Once your debts are paid off, and you cross the line from red into black, then setting goals and building a flash savings budget will be the natural next steps.

You have the power to eliminate your student loans quickly. But knowing is only half the battle.

Are you willing to make the move?

Where to Start: Self-Assessments, Total Savings, and Goals

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Knowing where to start is difficult, especially when it comes to changing your relationship with money. Alright, maybe you intuitively understand your spending is a little out of control, perhaps you are only just starting to pay attention to your savings, or maybe a friend disclosed how much they have stashed away for retirement (and it is a lot higher than yours). Any of these scenarios might lead you to dig a little deeper into this whole personal finance thing. So now that your interest is peaked, where do you begin?

For anyone new to the world of personal finance, I always suggest coming up with a vision of where you want to be. Naturally, that starts with an assessment of where you are today. The first step in understanding where you are is to list out all of your checking, savings, investment, and retirement accounts.

Below is a list of accounts that you can print out. Fill out all of the relevant accounts with their individual balances. If you only have one account, do not panic, this is only the beginning.

Now that you have all of your accounts and balances listed out it is time to assess where you stand. Let’s take a look at your Total Balance. How are you doing? Well, that depends on how much you earn throughout the year (your total taxable income). If you earn more then you should have more saved and if you earn less then you need to have less saved. This is because the metric for savings is a ratio of income to savings, or what I like to call your Flash Savings Number (Flash Savings Number = Total Savings/Total Taxable Income). This ratio gives you a quick view into your financial savings health. And a great rule of thumb is to have 2-3X your salary saved by the time you are 30 years old, or a Flash Savings Number of 2-3.

Below is a list if salaries with a recommended corresponding savings number ranging from two to three.

There are two types of readers at this point. One is breathing a sign of relief and the other 99% are screaming Holy Shit! If you are in the group with the anxiety attack setting in, do not worry. You can now leverage the fact that you know you are behind on your savings to insert positive habit changes into your financial life. With persistence, you will be able to turn your finances around in a matter of months.

Whether you are hitting your total recommended savings or not, now is a perfect time to come up with some short-term and long-term goals. By creating this list of goals, you will give yourself a metric to judge performance and, from time to time, you can look at back at your progress. Fill out your goals in the chart below (seriously, get out a pen and write them down – don’t just think about them).

Now that you have completed your financial self-assessment, evaluated your savings, and set short-term and long-term goals it is time to get to work. But what are the next steps? Over the next couple of articles, we will investigate how to create a budget, which will allow you to pinpoint areas of financial strengths and weaknesses. After evaluating your budget, we will create an automatic money flow system that will allow you so save money while you sleep.

For now, you are at the starting line. Knowing where you currently stand will give you the visibility to determine exactly where you want to go.

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