Millennials May Not Be As Financially Smart As We Thought

two men talking over some coinsIn December 2012, Foxbusiness.com painted a picture of a smart younger generation. The article praised Millennials for trying to learn from the mistakes of their parents and grandparents. This generation, as young as they are, have displayed the most concern about retirement. In fact, some of them have sworn to stay away from credit card debt – seeing that it brought their elders a lot of difficulties. They saw how too much debt forced them to sacrifice a lot of things that they should have been enjoying.

While it seemed like they are off to a good start, study shows that Millennials may not be as financially smart as we all thought they were. They displayed some habits that could seriously ruin finances – maybe even before they have amassed a significant amount of it.

What is the plight of the Millennials’ personal finances

On November 2013, Experian.com released the fourth credit study that showed the credit situation of every generation alive today. It focused on three: Greatest Generation (66+yo), Baby Boomers (47-65yo), Generation X (30-46yo) and the Millennials (19-29yo). In the infographic that summarized the study, it was revealed that although they do not have the highest debt, Millennials are displaying bad financial behavior that threatens their reputation of being financially smart. The highlights on the infographic showed the following:

  • Millennials have the lowest credit score. Since this was released by Experian, the credit score is computed using VantageScore. This generation has an average of 628, followed by the Generation X with 653, Baby Boomers with 700 and Greatest Generation with the highest score at 735.

  • Millennials have the second to the lowest average debt at $23,332. The highest spot belong to their parents, the Gen X who have an average debt of $30,039. The lowest is the Greatest Generation with $23,245 and the Baby Boomers are placed in between with $29,317.

  • Millennials have the least amount of credit cards that averages at 1.57. They are followed by the Greatest Generation (1.9), Gen X (2.13) and Baby Boomers (2.66).

  • Millennials have the lowest credit card balance at $2,682. The highest are the Baby Boomers with $5,347, followed by the Gen X with $5,343 and last the Greatest Gen with $3,044.

  • Millennials have the highest credit utilization – at least they are tied with their parents, the Gen X at 37%. This means they have a 37% balance to credit limit ratio. The lowest are the Greatest Gen with 16% and the Baby Boomers have 30%.

  • Millennials have second to the highest delinquency rate. The first are the Gen X with 0.61 late payments, followed by the Millennials at 0.58, Baby Boomers at 0.33 and the Greatest Gen have the lowest at 0.14.

So what does all of this say about the Millennials? We’ve noticed three problems that prove they need to learn more about being financially smart.

First is they have a low credit score. As young as they are, they have to realize that they are going to get a loan sometime in the future. It is very difficult to buy a home in cash. The chances of them requiring a home loan is very high. So if they have a low credit score, they might be given a high interest rate on their mortgage. A high score would help them save a lot because they will be deemed as a low risk borrower.

The second revelation about Millennials that helps in lowering their credit score is their credit utilization. A high balance to limit ratio is not good for your credit report. It shows that you cannot control your spending – which is a bad sign for lenders.

The third thing that paints an ugly picture for Millennials is the fact that they have a high delinquency rate. Apparently, they are slow to pay their dues. This is not a good sign. The credit utilization can be blamed on the low number of credit cards. But the late payments – that is entirely because of bad financial behavior.

How can the Generation Y be smarter with their finances?

Obviously, there is a lot of room for improvement before Millennials can really be financially smart. All it really takes is more education, commitment and discipline. Knowledge is not really enough. They have to be very committed when it comes to changing the financial habits that they have right now.

If you are one of them, here as the things that you have to commit to when as you try to learn how to be financially smart.

  • Pay dues on time. The top two popular debts that Millennials face are student loans and credit card debt. There are so many consequences when defaulting on student loans so you do not want to be late on them. It cannot be discharged by bankruptcy and it can take away your wages or your Social Security benefits. You need to make sure that you will pay this no matter what. For credit card debts, it may not be as punishing as student loans when it comes to late payments, but it can still be destructive. The high interest rate and finance charges can really grow your debt significantly over a short amount of time. Try not to let this happen.

  • Put your finances on a budget. A budget plan is one of the habits that will make you financially smart. It will help you ensure that your debts will be financed and paid on time. It is the tool that you can use to help you understand where you stand financially. It will keep you from spending too much so you can live below your means. It also allows you to plot any financial goal that you may have and see it through. You can put it high on your budget so it is always funded.

  • Be smart with your debts. It is weird how some Millennials are scared of taking a lot of credit cards because they are afraid of debt. While debt can be destructive, you should not be afraid of it. Credit only becomes destructive if you let it get out of hand. But if you know how to utilize debt to your advantage, it can actually help you improve your wealth.

  • Set specific financial goals. Some Millennials have committed to saving up for their retirement and that is a good start. But that is not everything that you can prepare for. What about your home? Try to start saving up for your down payment so you can save on the PMI costs. Or you can actually start saving up for your kid’s college education. Millennials who have kids may be young but there is no such thing as preparing too early. You can save and finish the goal early and so you can start on another one.

  • Start investing. Concentrate on your career growth but do not forget to set up other sources of income. Invest in stocks, put some of your money on mutual funds – there are so many ways that you can set up a portion of your savings to increase your income. Just make sure that you understand what you are investing on before you proceed. And if you are timid about it, invest only what you can afford to lose. If it earns, then use the profit to add to your investment capital. Repeat until you have grown your money.

There are so many things that you can do to improve your financial habits but the bottom line is to live below your means. If you have to take on debt – which is not bad, make sure that you understand how to utilize it to your advantage so it will not ruin your finances.

Here is a video of a Millennial discussing his financial priorities and how his young family deals with debts, monthly bills and long term financial goals.