In the popular imagination, millennials are stuck in a prolonged state of financial adolescence.
They have no car, no house, no spouse, and are overwhelmed by student loans. It may not be their fault, but they are worse off than Gen Xers or baby boomers, argues recent coverage of a study by the Federal Reserve Board. The study estimates millennials—the generation born between 1981 and 1997—have less wealth, income, and trappings of adulthood than other generations did at their age. But there is another way to interpret the the Fed’s results. It could also be argued that millennials are in fine shape, maybe even richer than previous generations, but they have just chosen to invest in different assets. This may even be a smart strategy: Baby boomers and Gen Xers grew up in a different economy where people needed different assets to survive and signal success. The world has changed. If you measure millennials by old metrics they look poor, but they might just be well-hedged for the new economy.
Since the boomers reached financial maturity in the 1980s and Gen Xers in the 1990s, there have been both gradual and dramatic structural shifts in the economy. Advances in technology change how people communicate and work. As the economy moves away from low-tech manufacturing and into high-tech and services, the returns to increased levels of education increased. College graduates can expect to earn about $1 million more in their lifetimes than Americans without a degree. Or, to put it another way, lacking a degree poses serious costs. High school graduates face stagnating wages and higher rates of unemployment.
Given those economic shifts, paying for more education—through college loans—may be a smart strategy because it may be the best way to protect your future earnings in a changing economy. Taking on debt to fund more education—assuming graduation with an undergraduate degree—tends to be a sound investment with higher wages more than covering the costs of debt. True, there’s no guarantee it will pay off, but for many millennials it is a risk they can’t afford not to take. According to the Fed, millennials are the most educated generation, with 65% possessing at least an associates degree.
Millennials are not only more educated, they are also more urbane. The changing structure of the economy rewards living in large, urban areas. In a knowledge economy, big cities are where they find well-paid jobs and valuable social networks. Better opportunities, coupled with falling crime rates, means millennials tend to live in cities more than previous generations. More time in school and city living requires different life choices than boomers and Gen Xers and it shows up in millennials’ asset portfolios.
The Fed estimates millennials have slightly lower median net worth (defined as their assets minus debt) of $42,000 than Gen Xers had at their age ($48,000). But that doesn’t mean millennials are actually poorer, because their net worth doesn’t include the value of their future labor, which is worth more because of the extra education. This may be why millennials have slightly lower earnings and net worth when they are around 30; they’ve had fewer years of job experience and years to save. But they catch up quickly because wages of college graduate grow faster and they have fewer periods of unemployment. If the Fed included their expected future earnings in the net worth estimates, millennials would probably come out ahead.
Overall, millennials have less debt than previous generations. They carry lower credit-card balances at the same age—$1,800, compared with $2,500 for Gen Xers. The Fed speculates the financial crisis scared millennials from over-borrowing, which might make them more resilient and flexible in future economic downturns. They do have more student debt, and this is an oft-cited reason for low rates of homeownership. But choosing education over mortgage debt is not necessarily a bad financial choice. One is an investment in human capital which will probably increase their earnings for the rest of their working years, the other is a bet on a single house, the value of which can be affected by events outside its owners control. Besides, student debt often involves a lower interest rate than credit cards or sometimes even a mortgage, depending on your lender. If the Fed included interest payments into its projections, millennial net worth would look even better.
When it comes to spending, the paper estimates millennials pay more for housing and are less likely to own a car. This could be the result of millennials living in cities where car ownership is less necessary and housing is more expensive. But, like education, city living is an investment in future earnings and skill development. Millennials also marry at a later age and have fewer children. This also can be a smart choice: Marrying later increases the odds of a successful marriage. Add in a lower probability of divorce—an expensive life event—and millennials look even wealthier.
The truth may be that millennials are not immature, impulsive, unable to commit, and burdened by a failing economy and overwhelming debt. Instead, many are not hung up on outdated status symbols likes houses, cars, or a spouse that defined the past economy. Instead, they are making smart investments in education and where they live, which will help them succeed in the new economy.