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Stop assuming millennials struggling financially have a spending problem

Written by: Megan Leonhardt

Maybe you’ve heard it from your parents or seen it on social media, but a certain piece of advice seems to pervade the financial world: If you just stop spending on unnecessary luxuries — from lattes to avocado toast — you could afford the everyday essentials without the struggle.

However, that’s often not true. The problem is that simply telling people, particularly millennials (ages 24 to 39), that they have a spending problem or recommending they trim their budget if they’re struggling to afford expenses misses the point, experts say.

“In my experience, those with few resources are quite savvy with the resources they do have — they are creative and often manage their money better than people who do who have money because they have to,” says Kristy L. Archuleta, a professor in the University of Georgia’s financial planning, housing and consumer economics department.

Why do people immediately assume it’s a spending problem?

The misconception around why some people struggle to make their money stretch to cover all their expenses and savings goals is due, in part, to the fact that poverty and living in poverty is not a “one size fits all issue,” Archuleta tells CNBC Make It.

This thought process typically happens because most Americans are trying to simplify a situation that often stems from complex problems. Those who are living in poverty or even those juggling expenses paycheck to paycheck may also be grappling with issues that range from racial and ethnic inequality to addiction and mental health issues, says Farnoosh Torabi, personal finance author and host of the “So Money” podcast.

In my experience, those with few resources are quite savvy with the resources they do have — they are creative and often manage their money better than people who do who have money because they have to.
Kristy Archuleta
PROFESSOR AT THE UNIVERSITY OF GEORGIA

Americans are a culture obsessed with budgeting and cutting coupons, Torabi tells CNBC Make It. “We tend to have a narrow mindset when it comes to earning our financial independence,” she says. “We are led to believe that if people just cut their Netflix subscriptions or stopped buying $9 smoothies, that they’d be able to retire wealthy.”

Americans tend to also buy into the mindset that they have fewer options when it comes to their income potential, so they focus on what they buy and how they spend, Torabi says. Cutting down your budget to make ends meet might feel like something that’s more in your control.

But for some Americans, simply cutting entertainment and dining budgets — if they even had them to begin with — will not solve all their financial shortfalls. In many cases, they still can’t make child care or student loan payments. What do they do then?

For some Americans, there are systemic issues at play

“I’m all about taking financial matters into your own hands to the fullest extent. It’s important to save and be mindful of spending, but it’s not the true reason so many people are struggling financially,” Torabi says, pointing to the fact that wages have been stagnant for decades while the cost of living has escalated.

At some point, you don’t have a spending problem, Torabi says. Instead, “you might have an income problem or perhaps a living-in-the-current-United-States problem,” Torabi says.

Real wages effectively remained stalled last year, showing only a 0.2% year-over-year increase, according to the PayScale Index. But looking longer term, PayScale found median wages, when adjusted for inflation, actually declined 9% since 2006.

Meanwhile, basic costs increased year-over-year by 2.3% from December 2018 to December 2019, according to the Bureau of Labor Statistics’s Consumer Price Index. The cost of medical care rose 4.6% in 2019, the largest year-over-year increase since 2007, the BLS reports. Housing also jumped 3.2% last year, while education expenses rose 2.1% and food prices increased by about 1.8%.

You can skip on lattes all you want, but if you have $100,000 debt from student loans and you’re a psychologist or you’re in social sciences or the arts, you’re going to have a hard time paying for those loans.
Alex Melkumian
FINANCIAL THERAPIST AND FOUNDER OF THE FINANCIAL PSYCHOLOGY CENTER

The reason why many others are in debt is not because of buying too much coffee. Rather, it’s debt from expensive mortgages, student loans or even medical expenses, Alex Melkumian, a financial therapist and founder of the Financial Psychology Center, tells CNBC Make It.

“You can skip on lattes all you want, but if you have $100,000 debt from student loans and you’re a psychologist or you’re in social sciences or the arts, you’re going to have a hard time paying for those loans,” he says.

Overall, there are many systemic and policy issues that impact our financial lives, Torabi says. “It’s not fair or accurate to just call out somebody’s spending habits.”

What to do if you are simply spending too much

That’s not to say no one is overspending. Almost three-quarters of Americans have a budget of some kind, but 79% say they can’t stick to it, according to a December poll of 2,000 U.S. adults by shopping site Slickdeals. On average, they overshoot by about $150 a week, or about $7,400 a year.

The top three categories that cause overspending are online shopping, grocery shopping, and subscription services, the poll found, although coffee did make the top 10.

If you fall into that camp, it may be time to build a sustainable budget or take a hard look at your existing budget. Where are you overspending? What can you do to adjust to make it more reasonable?

You may want to start by eliminating distractions that can push you to spend: avoid social media, unsubscribe from marketing emails and untether your credit card from all those apps on your phone.

“We sometimes turn to spending as a way to release stress, anxiety, and other bad feelings — It’s a coping mechanism.
Farnoosh Torabi
PERSONAL FINANCE EXPERT AND AUTHOR

That doesn’t mean you can’t have any fun with your budget, Melkumian says. To stay on track and avoid any feelings of deprivation, he recommends his clients have a small amount set aside in their monthly budgets for “mandatory splurging.” This could be 1% of your monthly budget or an actual dollar amount — from $5 to even $100, whatever your budget will responsibly allow.

“When people have a hard time looking at numbers, because it means deprivation and it means the budget is going to take away my freedom, putting a line item that says something fun like mandatory splurging re-writes the narrative and helps redefine what that budget means to them,” Melkumian says.

If you are truly struggling with overspending, try to understand what’s at the root of it, Torabi says. Are you spending when you’re emotional? What’s triggering those emotions?

“We sometimes turn to spending as a way to release stress, anxiety and other bad feelings,” Torabi says. “It’s a coping mechanism and produces an actual chemical ‘high’…so we keep doing it.” Take time to solve the underlying problem: why you are spending in the first place. That may mean seeking out some counsel.

“You may want to work with a professional to sort some of your issues out and cure this once and for all,” Torabi says.

 

Originally published: https://www.cnbc.com/2020/03/03/stop-assuming-millennials-have-a-spending-problem.html

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Financial Stress and Your Immune System

How financial stress makes you susceptible to viruses and what to do about it.

On your average day, most of us endure a certain amount of financial stress. With the coronavirus pandemic threatening millions and millions of jobs globally, financial stress has shot through the roof. The biggest problem, particularly now, is that any kind of stress creates wear and tear on several systems in our bodies, including our immune system. Managing and reducing your stress levels is crucial if we come into closer contact with the coronavirus. As with any virus, the COVID19 respiratory virus requires a healthy immune system to have a chance at surviving it.

Understanding Stress.

We mostly think of stress as a psychological issue where we are overthinking, worrying, irritable, restless or overwhelmed. However, these mental strains affect the body as well as we experience tense muscles, racing heart, fatigue, insomnia, and lack of appetite. If you are worried about job security, paying bills or your retirement, the psychological stress creates a physical reaction. It channels energy and resources towards your nervous system to help restore your mental equilibrium.

Mental stress leaves your immune system vulnerable and unable to function optimally.

The human body operates on the principle of efficiency, only using what it needs and prioritizing what it considers to be most important. Under normal circumstances, one of the body’s primary focuses is maintaining the immune system as it is the body’s first line of defense against biological threats like germs, bacteria, and viruses. But in times of crisis, your body will go into survival mode and start limiting the allocation of resources. It will direct a lot of energy to your brain to solve the stress associated with financial challenges bombarding it. Your body is naturally resilient. By controlling your stress, you will allow it to focus on what is most important right now: your immune system.

What to do to reduce stress and strengthen your immune system.

  • Worry Sessions
    Speak to a trusted, positive friend about your financial concerns or even have a self-chat and play both the negative and positive stories. Keep it short. Set a timer. Ten minutes is enough. Vent your worries without overreacting or overindulging. Acknowledge your feelings, but don’t wallow in the negative ones.
  • Stay Aware
    Be mindful throughout the day. Stay aware of your inner dialogue the rest of the day as financial fear may still arise. Set them aside until your next worry session.
  • Breathing (mind/body)
    During the day if you feel anxiety creeping up on you, practice deep breathing. Supplying oxygen to the brain is one of the best ways to reduce stress. It stimulates the parasympathetic nervous system (PNS) and the amygdala (emotional part of the brain) to induce immediate calmness.
  • Exercise
    No need to run a marathon. And, right now you can’t go to the gym. But you can go for walks in safe areas or set up a spot in your home, connect with an online workout or yoga class. It is important to feel present in your body.
  • Connection
    In the era of “social distancing”, we MUST also remember that connecting with other human beings, especially in a time of crisis, is crucial to our ability to remain calm and build stamina for the fight ahead. Reach out on the phone, video chat or speak with someone already in your home. Get the support you need and offer support to others. This helps us to get out of our own head and fear.
  • Calm your nerves, boost your immune system.
    From essential oils, herbal teas and organic supplements there are countless items on the market today that offer holistic support to your physiology. Research online, ask friends or consult with a nutritionist or medical professional to find the best support for your system’s needs.

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Helping your children buy a home

What to consider and ways you can assist children in buying their first home.

Having somewhere to live is a basic necessity but the price of Australian property is making it increasingly difficult for young people to purchase a home.

Housing prices in Sydney are recovering fast from the downturn of the past 18 months. The median house price exceeded $1.14 million in December quarter 2019, the Domain House Price Report found.

At current growth rates, Sydney prices will hit new highs in 2020. The story is similar around the country. In Melbourne, house prices are back on track to reach a new peak, while units are already at record highs, Domain’s report shows.

ANZ Private senior financial advisor Jacki Tulloch says parents want their children to save for a home, but realise it now takes much longer to accumulate a 20 per cent deposit – the amount needed to avoid having to pay thousands of dollars for lenders’ mortgage insurance.

“There is a lot of concern that the more [the property market] goes up the bigger the house deposit has to be,” Tulloch says.

Parents with property experience can play a useful role in guiding their children toward home ownership and determining what is affordable.

Those who have the financial means often find satisfaction in transferring wealth to their children during their own lifetime, and helping their kids to buy in an area where they want to live.

“One fear parents have is that their children won’t be able to buy in an area close to them if they don’t help. They’re going to have to buy so much further away but they want to be close to family,” Tulloch says.

Before you help

Even with financial assistance, most young people buying a home need to take out a mortgage. And this can be a beneficial experience.

“Owning your own place and being responsible for your power bills, living expenses, and having to make monthly repayments on a mortgage is a huge financial discipline for people to learn,” Tulloch says.

The first step for the younger generation should be to speak to a lender to assess their borrowing capacity.

At this stage parents will want to rush in and help but what they should first do is consider their own financial needs. A good starting point is to see a financial advisor to determine how much capital to provide their children.

Before providing assistance, most wealthy parents achieve their own financial goals such as:

  • paying off their mortgage
  • becoming financially independent
  • owning a holiday home outright.

At a minimum, parents should generally make sure they have enough rainy day money and are financially comfortable before helping children, Tulloch suggests.

She adds that cash rates and dividends have fallen over the past few years and parents need to determine how the weaker outlook for investment income will affect their plans.

“Are they going to have to use a bit more capital or assets themselves to have enough to retire on?” she asks.

Protect the family dynamic

Parents with more than one child may need to consider whether they will be able to provide similar assistance to each of their children.

Tulloch recommends discussing with kids the fact that “the bank of mum and dad” is not limitless and what is a fair gift for each of the children.

One approach might be to keep a ledger of money given to each child which can be used to adjust what inheritance they get when the parents pass away, she suggests.

Parents need to strike a fine balance between supporting their children, and giving them too much, Dr Melkumian, a financial therapist and founder of US-based Financial Psychology Centre, says.

“I’ve worked with trust fund kids where they were completely taken care of from the get-go and unfortunately it hindered them greatly in their adulthood, in their professional lives, because everything was taken care of. They’re not used to having a work ethic,” he says.

Where that balance lies will be different for each family, but whatever the level of assistance, parents should consider documenting their reasons for giving, Dr Melkumian says.

The contents of such a document would vary from family to family: “Overarching themes could be discussed such as: ‘Are we buying this as a way to show our love for our child? Or is it also a practical step for our family and a legacy?’.”

Writing down each parent’s emotional goals in providing financial assistance allows parents to share their expectations with each other and with their children. This can help prevent feelings of resentment, guilt and shame, and protect the family dynamics if something goes wrong, he says.

Practical strategies to help

The next step is to decide how to provide the funds. Financial, legal and tax advisors can help determine the best approach, addressing questions such as:

  • What will the tax implications be?
  • What if the child’s marriage or relationship breaks down?
  • What if the child becomes ill or loses their job?
  • What if the child’s business fails?

A simple gift

The simplest option, says Tulloch, is often to gift money.

There are generally few tax consequences for either parent or child with a gifted sum and there may be no legal structures to establish. (Parents should seek professional advice to confirm the implications of a simple gift.)

The biggest drawback is that parents have no right to reclaim the money at a later date. This may lead to regrets if the child’s marriage or relationship breaks down, as the child’s partner may be entitled to half of the assets, including the gifted sum.

Similarly, if the child has a business that fails, creditors may be entitled to those funds.

Loans

Lending to children can achieve a similar outcome to gifting but with greater protection, says Brennan Solicitors’ Paul Brennan.

By structuring financial assistance as a loan – even if the parents do not intend to ask the child to repay the debt – the parents have the option to recall the money.

Reclaiming the money would allow the parents to return it to their child later on, after the reason for recalling it has been resolved. A loan can be forgiven on the parents’ death.

Establishing a loan is more costly than gifting money as it’s essential that the loan is correctly documented.

“You’ve got to see a lawyer,” Brennan says. “You can take a chance on all sorts of things but not this. You’ve got to have a lawyer do this because if you don’t it will just bite you on the backside later on.”

Having the loan secured by an asset – such as the property – can help to ensure funds can be made available to repay the loan if required, Brennan says.

Going guarantor

Another way parents can help is to guarantee the child’s mortgage. This allows parents to provide assistance without giving cash up front by using their own income or the equity in their property to secure the child’s loan.

A guarantee may allow the child to borrow more than they otherwise could.

However, Tulloch says parents are rightly cautious of this approach as they are faced with repaying the loan if the child defaults.

“You would want your child to have shown they can save and be quite responsible for their money before you put your house up as security,” she says.

Parents may need to pay for costly independent legal advice before entering such an arrangement.

Another risk is that if the child buys the property in joint names with their partner and the relationship fails, the child could lose half the house but the parent would remain guarantor for the full value of the loan.

Parents should also be aware that acting as guarantor affects the amount they can borrow for other purposes as lenders consider guarantees as borrowings when determining how much to lend.

Buying together

Some parents buy in partnership with their child with the intention that the child could buy them out at a later date to take full ownership of the property. The property may be owned directly or through a trust.

This may suit some families but Tulloch says it’s generally not popular as it prevents the child accessing first-home-owner grants and the parents may be required to pay capital gains tax when the property is sold.

Family protections

Whichever method parents are considering, Tulloch suggests they should encourage their child to put in place an estate plan and take out adequate insurance cover, with income protection and trauma insurance being the most important to consider.

“If you have loaned them the money you have certain rights in making sure they’ve got their finances in order,” she says.

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Discover Your Money Story

How does your brain process topics relating to money?

Think about bills. Think about home ownership. We each have preconceived ideas about what these mean, how we might deal with them, and how we feel about them. You didn’t have to think too hard to start making those associations, did you? Our brains create schemas to quickly determine the most likely threats and benefits of situations we’re faced with. These schemas are based on habitual actions, experiences, and lessons learned over time. Our past informs our minds on how to deal with the present. The same goes for how we deal with money.

We deal with money based on our experience with money in the past.

This is what we like to call a Money Story. A Money Story is a personal account of the role money has played across your life, from when you were very young, to now. Thinking deeply about your Money Story will help you determine how you approach finances today. Do the bills cause a monthly panic attack? Does thinking about debt make your heart stop? Do you buy things you know you can’t afford? Maybe discussing money problems with coworkers or friends seems completely out of the question. All these responses stem from your highly individualized past experiences with money, however, the good news is, your money story is not set in stone.

At the Financial Psychology Center we can help you map out your personal Money Story. We will help you to realize how it effects your current interaction with money and how you can change that story to be the Money Story you want!

While your Money Story starts in childhood with the first time you had to think about money and what that meant, we often begin by exploring what money means to you today. How do you react to a large bill? A large paycheck? How does saving money make you feel? Once you identify your immediate current reaction to money, you can dig deeper.

Many people, as children, didn’t have to think about money unless there was a lack of it. For others, control of money was a constant topic in the household. Take a moment to reflect on your first experience with money. What happened? Was it positive or negative? Did you learn anything? Can you identify any common threads to how you think about money today?

Investigating your financial potential.

How would your life change if you had a different Money Story? How would this new and improved Money Story help you achieve happiness? Visualizing a new normal when it comes to money helps get rid of the shame, fear, or uncertainty buried beneath your money decisions.

And ultimately, how can you utilize your new and improved Money Story to make positive changes in your life? Prepare to shift your habits to craft your new Money Story, one that you’d be proud to pass down to your children.

Doing this analysis of your money beginnings shows you why your current relationship with money is the way it is, and gives you the power to take control, creating a better future for you and your family for generations to come.