It’s every generation’s goal to be better than the one before. But for the first time ever, those under 40 may be worse off financially than their parents thanks to a combination of the housing market crash, soaring college debt and underpaying jobs.
A recent study from the Urban Institute shows that wealth-building among those under age 40 has stagnated, while their parents accumulated wealth. The study classified wealth-building as paring down debt, owning a home, saving and growing a retirement fund.
People in their 30s and younger currently have a net worth half of what their parent’s had during the same age. For those born before 1970, average household net worth nearly doubled from 1983 to 2010 despite the economic ups and downs. However, for the generations born after 1970, their net worth didn’t perform as well—their average wealth in 2010, adjusted for inflation, was about 7% below those similarly aged people in 1983.
Saving for and Owning a Home
Past generations had one major savings goal in the past, says Michael Schreiber, editor-in-chief of Credit.com: buying a home. But now, growing student loan debt and credit card debt hinders younger Americans' ability to grow savings.
“That was equated with the American Dream, but it’s just not the case anymore for Americans. Now they have a couple of big things to save for and one of them is college. If you defer that college debt, it accrues interest and that will consume all of your disposable income.”
Weighed down with massive student, which the Federal Reserve reports nears $1 trillion, saving enough for a down payment on a home is near impossible, and home ownership is a key part of establishing wealth over time.
“People would buy a house and hold onto it and equity would build,” he says. “If you can’t buy that house, you can’t generate the wealth.”
The Urban Institute’s study author Caroline Ratcliffe says those who did purchase a home during the great recession were also negatively impacted, which hurt any wealth they had worked to establish.
“Those in their 20s and 30s were particularly impacted,” she says. “It was recent homebuyers [during the recession] that were hardest hit, many of them have large mortgages no longer relative to their home values. Many ended up under water on their mortgages and couldn’t take advantage of lower interest rates in recent years.”
The ‘I’ll-Make-it-Back’ Mentality
Part of this generation’s trouble is that they view earnings on a scale that continues to tip in their favor, according to Lauren Lyons Cole, certified financial planner.
“Millennials are taught the trajectory goes up, but your earnings over your lifetime are a bell curve--at best,” she says. “You cannot rely on income in the future. You have to look at what you have today and what you are realistically making right now.”
Recent stagnate wages mean people aren’t making what they need to keep up with inflation.
“Everything is getting delayed and there is less time to make it up,” Ratcliffe says. “We have to focus more on younger generations now so they do have a softer landing when they have an emergency hit or they eventually have to retire.”
This mentality is a major risk, says Schreiber. Some may very well make up this spent cash, but many won’t.
“Some people certainly will make it back, but if not, that risk and pain is compounded over time,” he says. “That debt multiples.”
Impacts Now and in the Future
Schreiber says members of this generation are big consumers and will probably not curb their spending habits.
“We are a culture that enjoys consumption, but that will be felt when this generation has major life events that demand a big down payment that will drive them into deeper debt with no savings. Or when they have no equity to retire on, or haven’t saved,” he says. “The economic lifestyle of the average American is changing, and the rules have changed.”
In the short-term, this generation will continue to experience instability. If children are involved, that means more of a potential for future ripple effects, Ratcliffe says.
“It's important for young families to have stability. We know that instability among families and young children is bad for their development.”
But one positive short-term effect is that people are starting to worry, says Lyons Cole, which leads to change.
“A healthy dose of worry can help people to save more,” she says. “It can also make them more cautious in what they are investing in, including buying homes.”
Having less wealth will also mean more reliance on government safety net programs and Social Security.
“It’s realizing you have to be a millionaire in terms of total net worth to retire,” Lyons Cole says. “If we end up in a situation [in the future] where we have boomers who don’t have enough wealth, and the rest of us don’t have enough—that is definitely scary.”
Without established wealth, this generation will be unable to sustain itself over time, Ratcliffe says.
“It means relying on government support even more so than older Americans today,” Ratcliffe says. “We won’t necessarily have generations any more that are better off than previous generations. Looking at young generations today, the trend could get worse if we don’t address the issue.”