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How do I motivate young people (millennials) who just started earning to save and also the importance of savings? Should I focus on retirement? Wealth creation? Financial independence? Something else?

closed as primarily opinion-based by MD-Tech, Dheer, Victor, Aganju, mhoran_psprep Aug 16 '16 at 17:52

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  • 5
    Could you maybe try teaching them how to save money? Teaching them the value of saving is important, but equally important is teaching them proper and wise ways to actually do it - otherwise it's a lesson without any value. – Zibbobz Aug 15 '16 at 17:54
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    I'm concerned by the implication that millennials are somehow different than previous generations when it comes to motivations. I'm also concerned that this will lead to many speculative opinion-based answers that have no scientific backing. – zzzzBov Aug 15 '16 at 18:45
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    @AshleyZ I'd be interested to know what are the alternatives to saving when it comes to buying anything bigger than a week's wage. – KABoissonneault Aug 15 '16 at 18:48
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    It's not a question of motivation, it's a question of means. You simply can't save when you're stuck working part-time for $12/hour just to make rent and health payments each month. – Brian Aug 15 '16 at 20:31
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    Millennials are coming out of school with debts in excess of a typical down payment on a mortgage. They spend the ten years they'd spend saving money on paying off that college debt. Compound that with the fact that they need to eat, get to and from their place of work, have some kind of social life and pay bills and you have the reason why they don't save. They can't. It makes no sense to save when paying off debts. The current generation is drowning in the debts of it's predecessors, in part brought on by a savings culture. If people don't spend, there's no economic stimulus. – Daniel Lane Aug 16 '16 at 9:01
29

Talk freely about what you can now do because of saving. If you plan to retire sooner than most, or more comfortably than most, and can tie that to something you want them to do, show them that. If you buy a very nice car, or install a pool, and they wish they could afford that, tell them it took 5 or 10 or 20 years to save up for it, at x a week, and now you have it with no loan. Or be a cautionary tale: wish you had something, and regret not having saved for it. Young adults are generally well served by knowing more of parental finances than they did while they were dependents.

Ask them if they will want or need to fund parental leaves, make a down payment for a house, own vacation property, put a child through post secondary education (share the cost of theirs including living expenses if you paid them), or go on amazing vacations fairly regularly. Tell them what those things cost in round figures. Explain how such a huge sum of money can accumulate over 2, 5, 10 years of saving X a month. for example $10 a week is $500 a year and so on. While they may not want to save 20 years for their downpayment, doing this simple math should let them map their savings amounts to concrete wishes and timeframes.

Finally, if this is your own child and they live with you, charge them rent. This will save them from developing the habit of spending everything they earn, along with the expensive tastes and selfish speaking habits that come with it. Some parents set the rent aside and give it back as a wedding or graduation present, or to help with a downpayment later, but even if you don't, making them live within their true means, not the inflated means you have when you're living rent-free, is truly a gift.

  • I often see that many young people haven't learned how to save yet. When asked about saving most just "spend less than they make". Meanwhile they money they are "saving" is sitting in a checking account with 0% interest. Every few months they blow it on a new gadget or trip. Very few pay themselves first or have automatic transfers setup for saving. – Ellis Valentiner Aug 15 '16 at 17:16
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    seems like this should be a comment on the question, not this answer? – Kate Gregory Aug 15 '16 at 17:39
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    sure, and with low interest rates they may be right. But showing them the "mortgage insurance" premium you pay for a 5% deposit on a house instead of a 20% deposit may change their mind. As will grasping just how much even 5% is of a typical house price where you live. – Kate Gregory Aug 15 '16 at 20:55
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    @KateGregory agreed, but (I'm trying to think from their perspective) if they ask, instead of saving for 20 years and getting a car/pool/wahtever after 20 years, can't I just have it now, and pay my loan off in 20 years. I would have the thing I wanted 20 years earlier! – gopi1410 Aug 16 '16 at 5:59
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    Once they have a loan, you can point out that savings plans can be suspended when things happen - less hours this week, or laid off? It's possible to skip the saving transfer. But you can't skip your loan payment. You have more control if you save for things. That said, I don't intend to suggest they buy their house for cash, or go carless till they've saved the full amount. A careful mix of loans and savings gets you the most living for your salary. The question here is how to ensure they understand the right level of savings in that mix, and that it is not zero. – Kate Gregory Aug 16 '16 at 13:11
17

I posted a comment in another answer and it seems to be approved by others, so I have converted this into an answer.

If you're talking about young adults who just graduated college and worked through it. I would recommend you tell them to keep the same budget as what they were living on before they got a full-time job. This way, as far as their spending habits go, nothing changes since they only have a $500 budget (random figure) and everything else goes into savings and investments.

If as a student you made $500/month and you suddenly get $2000/month, that's a lot of money you get to blow on drinks. Now, if you put $500 in savings (until 6-12 month of living expenses), $500 in investments for the long run and $500 in vacation funds or "big expenses" funds (Ideally with a cap and dump the extra in investments). That's $18,000/yr you are saving. At this stage in your life, you have not gotten used to spending that extra $18,000/yr.

Don't touch the side money except for the vacation fund when you want to treat yourself. Your friends will call you cheap, but that's not your problem. Take that head start and build that down payment on your dream house.

The way I set it up, is (in this case) I have automatics every day after my paychecks come in for the set amounts. I never see it, but I need to make sure I have the money in there.

Note: Numbers are there for the sake of simplicity. Adjust accordingly.

PS: This is anecdotal evidence that has worked for me. Parents taught me this philosophy and it has worked wonders for me. This is the extent of my financial wisdom.

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    This worked for us as well. With two people saving, we bought our dream house at 30 with almost 30% downpayment and thus we got a super low interest rate on it. – Sumyrda Aug 16 '16 at 6:44
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Although my kid just turned 5, he's learning the value of money now, which should help him in the future.

First thing, teach him that you exchange money for goods and services. Let him see the bills, and explain what they're for (i.e. "I pay ISP Co to give us Internet; that lets us watch Youtube and Netflix, as well as play games with Grandma on your GameStation"). After a little while, they will see where it goes, and why.

Then you have your automatic bills, such as mortgage payments. I make a habit of taking out the cash after I get paid, and my son comes with me to the bank where I deposit it again (I get paid monthly, so it's only one extra withdraw). He can physically see the money, and understand that if the stack is gone, it's gone.

Now that he is understanding things cost money, he wants to make money himself. He volunteers to help clean up the kitchen and vacuum rooms in the house, usually without being asked. I give him a dollar or two for the simple chores like that. Things like cleaning his room or his own mess, he does not get paid for.

He puts all his money into his piggy bank, and he has some goals in mind: a big fire truck, a police helicopter, a pool, a monster truck, a boat. Remember he's only 5. He has his goals, and we have the money he's been saving up. We calculate how many times he needs to vacuum the living room, or clean up dishes, to get there, and he realizes it takes a long time. He looks for other ways to make money around the house, and we come up with solutions together.

I am hoping in a year or two that I can show him my investments and get him to understand why they make or lose money. I want to get him in to the habit of investing a little bit every few months, then every month, to help his income grow, even if he can't touch the money quite yet.

5

Are you sure the question even makes sense? In the present-day world economy, it's unlikely that someone young who just started working has the means to put away any significant amount of money as savings, and attempting to do so might actually preclude making the financial choices that actually lead to stability - things like purchasing [the right types and amounts of] insurance, buying outright rather than using credit to compensate for the fact that you committed to keep some portion of your income as savings, spending money in ways that enrich your experience and expand your professional opportunities, etc.

There's also the ethical question of how viable/sustainable saving is. The mechanism by which saving ensures financial stability is by everyone hoarding enough resources to deal with some level of worst-case scenario that might happen in their future. This worked for past generations in the US because we had massive amounts (relative to the population) of (stolen) natural resources, infrastructure built on enslaved labor, etc. It doesn't scale with modern changes the world is undergoing and it inherently only works for some people when it's not working for others.

From my perspective, much more valuable financial skills for the next generation are:

  • how to avoid going into debt
  • how to budget and make choices about where to spend money
  • how to do things yourself that cost a lot to have somebody else do for you
  • how to make use of safety-net infrastructure if or when needed
  • 2
    "How to motivate a person to save" does not necessarily imply "how to motivate a person to save a significant amount of money". Even getting into the habit of setting money aside, even if it is a pittance in an account that earns no interest whatsoever, can be significant just for the habit of saving. Even for someone with very limited income, I suspect it's a lot easier for a lot of people to bump, say, the weekly savings from $10.00 to $10.50 than it is to get started in the first place. Lots of such small bumps will push the savings amount upwards quite a bit. – a CVn Aug 16 '16 at 8:56
  • how to avoid going into debt/how to make use of safety-net infrastructure - is this not the same thing as saving? Putting some money aside each week/month is exactly how you have an emergency fund, and also how you manage to buy things without going into debt... – Andrzej Doyle Aug 16 '16 at 15:07
  • @AndrzejDoyle: Both of those are very different from each other and from putting away money as savings. Spending months or years saving up to buy a $25000 car is a lot different from buying a $4000 car instead of the $25000 car. Sure both avoid incurring debt, but the former ties up a significant portion of income that you could be using for other productive purposes. – R.. Aug 16 '16 at 15:17
  • Regarding "emergency funds", while is it useful to have some level of that for small "emergencies", the only way an emergency fund can protect you against big emergencies is to be at least as large as the worst-case emergency cost you need to prepare for. The cost of insurance, on the other hand, is only moderately above the expected cost, not the worst-case cost, and distributes risk in a relatively equitable manner. – R.. Aug 16 '16 at 15:19
  • Another example of safety nets vs saving emergency funds would be educating yourself about unemployment before you need it, so that you don't have to dip into personal savings to deal with an "emergency" that your employer was already paying into a pool to cover. – R.. Aug 16 '16 at 15:23
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I recommend pulling up a retirement calculator and having an honest conversation about how long term savings works, and the power of compound interest. Just by playing around with the sliders on an online calculator, you can demonstrate how the early years are the most important. Depending on how much they make now and are considering saving, delaying 5-10 years can easily leave 6-7 figures on the table.

If it's specifically a child or close family member, I recommend pulling up your retirement account. Talk with them about how you managed it, and how much you were putting in. Perhaps show them how much is the principal and how much is interest. If you did well, tell them how. If you didn't do as well as you liked, tell them what you would have done differently.

Finally, discuss a bit of psychology. Even if they don't have a professional job and are making minimum wage, getting into the habit of saving makes it easier when they eventually make more. A couple of dollars a month isn't much, but getting into the habit makes it easier to save a couple hundred dollars a month later on.

2

As a 20 year old who has just started earning enough to save, I suggest showing them the different types of lifestyles they could live in the future if they started saving now versus what their life would be like if they didn't save at all. Try showing them actual dollar values as well so it's not just an arbitrary idea.

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Teach them that money can help solve most (if not all the problems) in life. If they truly appreciate the value of saving every single penny, eventually they will come to realize that if you don't touch your money (waste it on useless things you don't need such as eating out) that it can grow. Also teach them the value of compounding interest, even a TFSA/high interest savings account with a modest 3-4% annual ROI can be big with yearly additions and no withdrawals for a lifetime.

Tell them to take Johnny Appleseed for example. Johnny starts up his TFSA with help from mom and dad at the age of 15, let's say they put in $5000 all together. Now let's say he adds in a modest $2500 to his TFSA every year until he is 55 years old. If the TFSA has an interest rate of 4%, then when he's 55 he'll have over half a million dollars in the bank and he really didn't have to do much besides not touch it.

  • "Also teach them the value of compounding interest" remember about inflation though. Compound interest works to increase your numbers but inflation works to make those numbers mean less in real terms. – Peter Green Aug 15 '16 at 17:46
  • Indeed @PeterGreen, and capital gains taxes are usually levied based on the nominal amounts involved... – a CVn Aug 16 '16 at 8:58
  • "A modest $2,500 per year" At 16, this is not a modest amount; this is additional allowance money from a parent... that's a different idea than saving your own money... Also the answer would be improved if Canada-specific tax language was removed [replacing "TFSA" with "tax deferred account, if available", or something along those lines] – Grade 'Eh' Bacon Aug 22 '16 at 13:18
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In the United States you can't, because the average millennial in the United States has no opportunity to save money.

Either you get a college education, then you will be burdened with a student loan. The cost of college education skyrocketed in the past decades. It is now practically impossible to enter the workforce without a huge debt, unless you are one of the lucky few who has rich and generous parents.

Or you skip college. But college is the only way in the United States to obtain a generally accepted qualification, so you won't get any job which pays enough to save any money.

As soon as that student loan is paid off, you need to get another loan for you house which you pay off for several decades.

As soon as the house debt is paid off, you will be old and develop some medical problems. The medical bills will come in and you will be in debt again.

So when in their life are millennials supposed to save money?

  • 2
    "You can't, because the average millennial in the United States has no opportunity to save money." Where, oh where, does the OP indicate that this is necessarily about the USA? The question doesn't say, and the OP's profile gives their location as Bengaluru, India. – a CVn Aug 15 '16 at 20:26
  • @MichaelKjörling Updated answer to be specific about the United States. Different countries have completely different circumstances which requires a completely different answer. When you think that this makes the question too broad, please vote to close it as such. – Philipp Aug 15 '16 at 20:41
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    My wife went to college and graduated. I bought a house and a car when I was 23, neither of our parents paid for our schooling, we worked though school/took out small loans. We have 12-13k in retirement funds though 401k's and IRA's, little school debt left, no credit card debt, car is paid off, have a kid that was delivered by emergency c-section, (no medical debt). Oh and and my programming job was outsourced and we lived on our savings fund, which we saved for moments just like this, for 5 months while I got a new job. So... your answer is false. P.S. We aren't even 30 yet, – Ryan Aug 15 '16 at 22:22
  • "It is now practically impossible to enter the workforce without a huge debt, unless you are one of the lucky few who has rich and generous parents." Actually, having parents who take the time to teach math and science undeterred by "the system's" schedule for doing so is far more effective, and available to many more people. There's a lot of merit-based scholarship money out there for those who prepare. Next, if an affordable house is taking multiple decades to pay off, that's because you aren't paying it off as-fast-as-possible, which means part of the remaining income can be saved. – Ben Voigt Aug 15 '16 at 22:22
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    -1, because it doesn't answer the question. But I also disagree with most of this answer. It is still possible to obtain a college degree without debt or wealthy parents (although not at expensive private schools). And a college degree, although helpful, is not necessary to thrive. (Learning a trade is often a much better option financially than obtaining a liberal arts degree.) Telling millennials that they NEED a college degree and they NEED to go into debt to obtain it does them a disservice. – Ben Miller Aug 16 '16 at 1:02

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