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A recent Moody’s report analyzing the savings rates of Americans has found that people 35 and under are spending more money than they are bringing in. This finding has sparked a number of critical headlines focusing on the “irresponsible” spending habits of Millennials. But if you ask us, all of these stories focusing on this one single point of data simply add up to a bunch of hot air.
What many of these articles have failed to address is the dramatic rise in the cost of education that this generation has faced. Tuition rates have increased over 300% since 2000. So while education remains an invaluable investment in their future, just like any investment it creates real costs in the present. More specifically, paying down historically high student loans and credit card debt incurred during college and graduate school. When these, and other extenuating circumstances, are taken into account it quickly becomes clear that “savings rate” is the entirely wrong metric by which to judge the financial responsibility of all Millennials.
For instance, if someone puts every extra dollar towards prepaying their student loans they’d have a 0% savings rate, but their net worth would likely be consistently improving. Shouldn’t it be considered financially savvy to invest in your future through education, and then even savvier to pay down high-cost debt before savings? Unless you believe your savings will return higher than the 7-10% you’re paying towards student loans or 15-25% for credit card debt.
In addition, Millennials are moving to expensive urban centers to take full advantage of their pricey degrees. In the short-term they are juggling high expenses on entry-level salaries, but with that long-term goal of entering a career with high-income potential.
At Earnest, we give credit to this type of potential. When lending money we don’t simply assess a candidate’s credit past, or present even, we look at their future as well. We evaluate people based on their full and prospective net-worth, focusing well past current assets and savings. And in the process we consider how well an individual has positioned themselves for future success, factoring in the short-term sacrifices they make for their long-term financial prosperity.
Granted, not all Millennials fit the above description, but the majority of the ones we talk to are making these strong investments in their future selves.