Ben Soppitt

The Millennial Bomb just started ticking

2019 saw the last of the Millennial generation graduate.2020 is the year the Millennial generation becomes the most important economic force in the US with a combined spending power of over $1.4 trillion.Millennials are facing a unique set of financial pressures with massive student debt, increasing cost of living and lower relative incomes which could combine to create an economic timebomb by the time they retire. This is especially acute, ironically for high earning professionals living in high-cost areas.

Faced with a high cost of living, staggering student-loan debt, and the fallout of the Great Recession, American millennials are trying to make ends meet in the midst of The Great American Affordability Crisis. (source: Business Insider)

Being young, educated and in a good job in a major city like San Francisco, New York or Los Angeles is a potential recipe for financial disaster. Poor decisions made now could negatively impact the rest of your life.Einstein famously said “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” Paying it has become both a necessity and easier than ever.The costs of living have escalated beyond belief – not just housing but things that did not exist 20 years ago that have become necessities in modern life – iPhones at ~$1k plus $80 a month on network services plus the $200 EarPods, laptops same, shoes that are now so expensive they are considered a tradable asset (check out www.stockx.com and www.goat.com) Balenciaga, Nike, Adidas, Yeezy, Aprix, Swear, Common Projects can all set you back over $500, substantially more if they are rare or sought after.It’s routine for relatively everyday items to be considerably more expensive than previously – www.grailed.com sells sweatshirts at $650, Supreme, Off White, Billionaire Boys Club all market seriously expensive everyday wear to which many aspire.Culturally it’s become the norm to rideshare, drink $4 coffees once or twice a day, have food and many other things delivered and auto-buy with subscriptions. We are exposed to more and diverse marketing channels than ever and paying for things has become so easy and frictionless it is easier than ever to unconsciously spend.The only things that seem to have got cheaper are things that many Millennials barely even use like TV’s and gas."Facing a stark set of financial circumstances, millennials started adulthood with less room for financial mistakes than previous generations," Shannon Insler wrote in an article for Student Loan Hero.Those spending longer in academic study have the odds stacked against them from the start despite their likely high earning potential on graduation with Medical and Legal graduates carrying >8x the student debt of average graduates.If Millennials expect to maintain this lifestyle into retirement they are going to have to save as much as 40% of their salary for the next 30 years according to one study. That takes an awful lot of discipline and forward planning something that few people are very good at especially those in their 20's. This is hardly new news governments have spent millions of dollars on financial education in the hope to educate and inform people to save and invest for retirement with little effect. In the last 10 years, we have seen the rise of personal financial management apps that make it easier than ever to optimize for ROI on personal money. The problem with these, however, is one of motivation - the people who need them the most are the least likely to use them.Conventional financial services companies have done a historically poor job here, with high fees and poor performance taking more from people pockets than giving back. The rise of alternative FinTech companies have to an extent helped bring competition, lower costs and new features and functionality to help make it easier to save, plan and invest. The irony here though is that it has made an already complicated market even more fragmented and complicated. Whereas 20 years ago it would be typical to have only 1 or 2 banking relationships it would not be atypical for some after 10 years of work to have 10 or more between credit cards, bank accounts, savings accounts, investment accounts, PFM apps, 401K's and more. This very complexity makes it harder for the average person to maintain an optimal ROI on their own money - even whilst individual elements might be optimised.The only strategies that have worked to protect people from their own inability to plan for their retirement are making such saving mandatory and automatic.If automation is at least an important part of the answer how might that be applied more broadly in financial services? We have seen this begun to be implemented with Robo advisory platforms like Wealthfront and Betterment. We have seen effective use of psychological nudges such as passive contributions with Acorns. If we were to extend that more broadly across saving, spending and investing - the core every money management tasks we all do, it would be a product that would have to simultaneously maximise cash deposits interest (a function both of the interest rate and time it is in the account), maximise rewards from credit and debit spend and drip feed those savings into a low cost highly diversified funds.This would save the average affluent Millennial - statistically likely to work in medicine, law, tech and finance over >$1,500 a year increasing every year with affluence over their working life. On a compound basis, there is likely to be a cash saving of >$100K over that period plus any relative increase due to investment returns and dividends.Maximising passive income through the automation of everyday money management can only be a part of overall long term financial management approach. But for the first time in history we have the technology to enable this and it creates one of the easiest ways for a person to effortlessly protect and grow their financial security.

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