Generation Y personal finances: a crisis of confidence and capability

1. Context
2. The study
3. Key findings
4. Points to consider

Context

Generation Y is the term applied to the part of the population born between the late 1970s and the mid-1990s (a group also known as Millennials). It is the largest, most diverse generation in US history, and characterised as buoyant and ambitious notwithstanding the impact of recession at a key time in its development.

This generation faces substantial challenges thanks to a combination of a fragile economy, student debt, and an unstable employment market. There are specific concerns about unprecedented levels of student debt and apparent overconfidence in financial matters.

The study

This study from the USA investigates the relationship that Generation Y has with managing financial assets and debts. It highlights the challenges they face and looks at how credit unions can help.

The research is based on analysis of the 2012 American National Financial Capability Survey (NFCS), which benchmarks financial capability and provides information on Americans’ short term financial management and medium to long term financial planning. The NFCS has over 25,000 respondents, and the analysis in this study uses a subset (of over 5,500 observations) to examine financial capability among 23-35 year olds (Generation Y).

The study was sponsored by the Filene Research Institute, an independent ‘think and do tank’ focused on issues affecting the future of credit unions, retail banking and co-operative finance in the USA.

Key findings

The study highlights the following key findings:

• Looking only at assets, such as savings or investments, provides a limited view of Generation Y's financial profile.
• Debt is widespread among Generation Y; most carry short- or long-term debt or both.
• Members of Generation Y feel over-indebted.
• Student loans are a major source of debt among the college-educated, and most are concerned about their ability to repay their loans.
• Generation Y uses expensive methods of borrowing, such as credit cards, payday loans, pawnshops, and alternative financial services (AFS).
• There is an educational divide in the use of AFS. While 28% of Millennials with a college degree used AFS in the five years prior to the survey, 50% of respondents with a high school education or less have relied on AFS.
• While many Millennials have retirement accounts, many have already borrowed on those accounts.
• Millennials give themselves high marks in their ability to make day-to-day and long-term financial decisions, but there are clear signs of overconfidence.
• Professional financial advice is used sparingly. Many Millennials lack trust in financial professionals and think that professional financial advice is too expensive for them.
• Even though Millennials make many decisions related to investments and debt, most of them lack financial literacy and are not aware of their lack of financial knowledge.

Implications and conclusions

Generation Y's level of indebtedness and their deficiencies in personal financial management skills pose important questions for those who try to serve this generation. For credit unions, the implications of this research are:

• Generation Y members would benefit from assistance with debt management. To be at the forefront of customer service, credit unions should proactively address debt and debt management.
• Since they are unaware that they lack financial knowledge and are confident about their financial management skills, Generation Y can be difficult to engage. Since they want to be at the centre of their financial decision-making, an approach that recognises and takes advantage of this trait may yield better results than a standard delegation of decision-making power.
• Financial literacy is lacking for large numbers of this group. Credit unions could address this by creating a range of financial education tools targeting specific financial products such as mortgages, student loans or credit cards.
• This group should be steered away from high cost borrowing products. Credit unions may be better placed than many financial institutions to serve this group.

Points to consider

Methodological limitations: because this analysis is focused on a subset of the NFCS data, it does not use the weighting applied to the survey to make it nationally representative (a point noted by the report authors).

Relevance: the sample of over 5,500 from the NFCS data is sufficient to allow detailed demographic analysis of this population sub-group.  It is a highly relevant analysis of the Generation Y population in the USA.

Generalisability/transferability: data and analysis are specific to the USA and its environment and the circumstances of Generation Y members.  Findings are not directly applicable in other areas without reference to the differences in circumstances and environment.

Full report

Generation Y personal finances - full report