On nice weather days after school, our family often likes to play soccer on a public field near our house. The field is popular and associated with a local school, though. So we occasionally find that we need to turn to a backup option if the field is already fully occupied.
During breakfast, my five-year-old likes to ask whether I think the field will be available after school. I never actually know for sure, but I can make some educated guesses based on the time of year, day of the week, and weather forecast. Even if I’m wrong, we both find value in planning and mentally preparing for different scenarios.
Amid the COVID-19 pandemic, I currently find myself in a similar situation with personal finance. I certainly can’t claim to know what the future holds for our generation’s financial decisions. But I increasingly have some ideas using the information that we do have available to us.
The 2007-09 recession clearly affirmed that Millennials face different financial realities than our parents. With the benefit of time, though, we arguably still had an opportunity to overcome the new challenges that we face. The pandemic has changed that calculation, though. Many of the non-traditional financial moves that we may have viewed as optional likely have become necessary. For our generation, we may now have no choice but to approach personal finance differently.
The most immediate change, applicable to and forced upon everyone, is a budget reset. No matter how well or poorly we previously managed our money, business closures and stay-at-home orders have drastically altered our spending patterns. And some version of this shift likely will extend into the next year, as new social distancing practices change where and how we spend our money.
Many of the clients I work with on budgeting struggle to adjust their spending. If nothing else, we’re accustomed to automating so many recurring purchases. Plus, we rely so heavily on credit cards that the timing of purchases rarely aligns with the timing of payments. The pandemic, however, has shut down this system. We’re now confronted with conditions that, if we so choose, can fully redefine our spending habits.
For the first time in our adult lives, many people aren’t feeling as much pressure to spend. And factors outside of our control have disrupted purchases that we may have previously made without much thought. After spending so much time at home, I understand that we’re all eager to become active and social again, which often costs money. Yet, many of us likely will think twice before returning to ongoing spending commitments. We may question the value we receive from our most expensive forms of entertainment. A side effect of the financial stress that we feel right now may actually be positive feelings from any reduced spending. And I don’t think we’ll want to give that up very easily.
Any lasting changes in spending habits may align with a renewed, urgent interest in emergency savings accounts. Financial blogs and articles have long trotted out the typical “3-6 months” recommendation. For just as long, though, few people have understood how many months to choose or what numbers they should include in that calculation. Now that we have everyone’s attention, how will financial advisors help and what actionable guidance on cash savings will we provide?
No matter how interested we all become in emergency funds, the daunting tradeoffs that many Millennials face will still exist. My clients will still have student loan or credit card debt and an interest in buying a house or saving for a child’s college fund. What’s more, the financial goals that we set often have a very emotional and value-based component. On paper, the math may say one thing. That doesn’t change the fact that many new parents may be willing to go to great lengths to avoid their own parents’ mistakes or shortcomings.
The difference now is that so many more people have lived through such an “emergency” experience. We regularly wonder whether we’ll have enough money in three months. These memories may override or at least temper their typical financial feelings. The satisfaction of owning a house or saving for college may still be a powerful pull, but not as much as protecting themselves against an empty bank account. Emergency fund savings will remain a work in progress for almost everyone. In the years ahead, though, we may move much faster on this particular objective. That ambiguous rule of thumb, in fact, may soon sound more like “6-9 months.”
The pandemic may have forced our generation to value emergency savings accounts even more highly. Yet, emotions around housing also will play an outsized role in many decisions in the months ahead. Anyone who a few months ago thought about upgrading their housing now likely feels quite eager to move out and trade up. Even some people in a relatively advantageous housing setup can’t wait to devote meaningful money to renovations.
At some point, though, housing dreams will collide with savings realities. Certain young adults ultimately won’t be willing to part with money that now sits in their bank account. Others no longer will want to accept the (newly apparent) risk associated with a higher monthly payment. And a third group will try to move ahead with their housing goals, but not the scenario that requires them to contribute 20% for a down payment.
Under these new circumstances, more Millennials will consider asking parents for help. Based on pre-retirees’ precarious retirement status, though, I don’t expect they will alter the situation much. Many people also will familiarize themselves with alternatives to the “standard” 20% down payment, particularly FHA loans. And, perhaps most notably, shared equity purchase models — such as those offered by Unison, Point, and Noah — will gain more widespread acceptance.
The shared equity model seems well designed for this moment in history. Potential homebuyers may feel quite strongly about changing their living conditions. We’re now also acutely aware of the all-in costs (including risks) we incur in doing so. A deal in which we sacrifice some upside in exchange for a smaller outlay on the front end is one that will increasingly appeal to more people.
Without other reasons, some young homebuyers rationalize a housing purchase as a smart long-term investment. The good feelings that this thinking generates may even give them the confidence to push retirement savings further down their priority list. Even diligent retirement savers, though, can struggle to prioritize a goal that remains 30 years away. I regularly encounter Millennial clients who haven’t invested excess savings simply because they don’t know where to start or fear making a mistake. We’re now in a situation where people have also started thinking about liquidity, market volatility, and market timing.
Our generation needs to understand, with confidence, where and how to invest their money. This has long been true, but now we can’t afford to wait any longer. More specifically, we need to see that investing can be accessible, straightforward, and low cost. There will always be countless investment philosophies, many of which will be valid based on individual goals and circumstances. But we need to start — and stick with — the basics. We need to understand how to attain appropriate asset allocation and diversification with the least amount of monitoring and transacting.
Candid conversations about risk tolerance and asset allocation are more critical than ever. Financial advisors habitually point to target-date funds as the easiest way to invest, no matter your age or investing experience. This fallback is quickly becoming insufficient, though. Millennials may need to invest aggressively for longer to counteract lost time and multiple recessions. Target-date funds may adjust to account for this reality. But young investors also should know their way around a handful of index funds. We need to get our (extra) savings invested, and we need to feel empowered to do so — in a timely manner — on our own.
I would love every client meeting that I hold to include a discussion about generating self-employment income. Advisors and clients alike still spend most of our time focusing on cash outflows. We rarely have meaningful conversations about how to increase the money coming in. Yet, relatively few people think of themselves as entrepreneurs or potential business owners. As a result, even when the topic comes up, ideas and tips may only go so far. Most people are so focused on job hierarchies that they devote all of their working hours to an industry or employer’s expectations.
The pandemic has shown that employer income remains as fragile as ever, even for highly-skilled and educated workers. Financial advisors, many of whom are small business owners, have a responsibility to emphasize that self-employment income can take many forms. Rising young professionals don’t need to quit their jobs or sacrifice their current career plans. Entrepreneurship doesn’t need to consume their free time or force them to incur large upfront costs.
Rather, anyone with a specific skill set can begin to think about how to create and market services at which they excel. Gradually, they can build a network and seize opportunities to generate secondary income streams. Over the long term, as we face new threats to our financial stability, young adults who also focus on the plus side of the ledger will make themselves less financially vulnerable.
On those mornings when my son asks about playing soccer after school, he may also chime in with thoughts on how we can make that happen. He might point out that a certain time will be more effective than others. Or he might suggest that we bring our own mini soccer nets if prime areas of the field are occupied. In essence, he’s advocating for his own hopes and interests.
Ultimately, the tactical changes that we make to our personal finances in the months ahead will only get us so far. We need to start advocating for ourselves. We must learn to become comfortable talking about money. And in so doing, we need to become more vocal about the corporate and government policies that most impact our financial stability.
COVID-19’s devastating financial consequences became apparent to everyone very quickly. It’s still unclear — but a source of hope for me — how Millennials will think differently about personal finance in the years ahead. The pandemic, and the financial and economic systems in which it exists, will force our hand in many ways. But at least one thing will remain as true as ever about personal finance: how we act and the choices we make often will reflect our values. We have an opportunity to completely overhaul financial narratives, policies, and options if we allow our values to dictate our response to this pandemic.
Kevin Mahoney, CFP® is the founder & CEO of Illumint, an independent firm in Washington, DC that offers financial planning for Millennial parents. He specializes in navigating the new financial decisions that arise during our 30s and early 40s, such as repaying student loans, buying a house, saving for college, & investing for the future. In addition, Kevin also leads a financial wellness benefits program for Millennial employees around the country, including group speaking engagements.
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