Untapped Potential

Economic conditions shape Generation Y’s spending, investing habits

JONATHAN DEVIN | Special to The Memphis News

To listen to John Phillips talk, you’d think he was at least 10 years older than he actually is because of the seasoned advice he has for people his own age.

John Phillips V, 26, is chief investment officer at Red Door Wealth Management.

When talking about his generation – Generation Y – and its spending and investment habits, he uses the pronouns “we” and “they” interchangeably and sometimes sounds as if he’d like to wring some Gen Y necks.

“We’re the credit card generation,” said Phillips, 26, the chief investment officer for Red Door Wealth Management. “Instant gratification is what they’re looking for. Buy now, pay later. Savings are not there like previous generations. They are risk-averse compared to other generations at the same age. It’s unbelievable.”

Older generations stereotyped these young adults who came of age at the Millennium with gadget-addiction, job-hopping, short attention spans, and with inventing an entirely new version of English conversation in capital letters like OMG, TTYL and LOL.

But as early as 2008 while the American economy scrambled to find any glimmer of hope to cling to, early predictions were that Gen Y – also known as the Millennial Generation – with solid college educations, doting parents and a sense of independence and willingness to try new things, might actually save the day.

Trevor Hoey of the online employment magazine The Big Chair wrote in 2008, “With a strong focus on lifestyle ahead of employment stability, financial security and deadlines, generation Y can be an employer’s nightmare but a recruitment agency’s dream, a travel retailer’s frequent flyer or a financial planner’s most needy client. From an investor’s perspective, companies emerging as significant beneficiaries of generation Y can be found in a wide range of industries including fast food, fashion, and travel.

“While not having the accumulated wealth of their parents, the generation Ys do command attention as they approach that high-disposable-income period in their lives. Their relevance as an important consumer group will grow over the coming decade, prompting the same degree of scrutiny that the baby boomers and generation X have demanded.”

But can they pull it off? Phillips is still scratching his head. His experience with Gen Y investors is that they have been scarred by the psychological effects of the recession in which they watched as their parents lost millions in stock market investments and then they themselves graduated from college to find few jobs waiting for them. The effect has been a tendency to make what he calls “the wrong choices.”

He cited an Aon Hewitt report from October that suggested Gen Y doesn’t take advantage of good retirement investing through 401(k) programs even when matched by employers. Only 50 percent, he said, enroll, and only 41 percent of those contribute the minimum amount to be matched by the employer. A 2010 report by Finra Investor Education Foundation report said that 18- to 34-year-olds in Tennessee typically spend 25 percent more than their income, 38 percent have used non-bank borrowing and 73 percent have no rainy day funds.

“I think they view retirement as never happening,” said Phillips. “Their outlook is the next two years.”

Part of that is understandable.

Melissa Hass, a 25 year-old floor director for WREG News Channel 3’s Live at 9 show, said she is conservative with her investing by nature.

Generation Y member Daniel Lynn works three jobs, including sound engineer for Music + Arts Studio in Cooper-Young.

“I just work hard and try to put away what I can,” said Melissa Has, 25, member of Generation Y and part-time floor director for WREG’s Live at 9 in Peabody Place. (Photos: Lance Murphey)

“It comes from when I was younger and my family did not have a lot of money,” Hass said. “As a child I remember going through a bankruptcy. I always remembered I did not want to be like that ever.”

She started socking away money in a savings account at age 16 with the goal of having $10,000 saved by age 18. She still has a healthy savings account, a CD, and she rolled a 401(k) from an old job into an IRA. She plans to open a Roth IRA in the future. But the stock market?

“It’s foreign territory,” said Hass. “With the 401(k) I would put things in bonds and a few percentages in stocks, but me picking stocks? Buying and selling? I’ve been interested in learning about it. If I had a better understanding of it I would do it.”

That’s not exactly music to economists’ ears since Gen Y is currently the largest generation alive with more than 100 million potential investors and stock fire sales abounding.

Neither is Phillips happy about that since stocks are the clearest way for his clients to aggressively grow their accounts.

Hass wants cash close at hand, though, at least for now.

“There are options you could take so that you could get your money quickly if you needed it,” she said. “That’s the best option to have. I would need somebody to tell me exactly my (stock) options, lay it out on the table. If this was offered in high school I think they would have a more aggressive attitude, like, ‘I can do that.’”

Chris Miller, a 24 year-old IT specialist for a local attorney’s office, did take an elective course on finance and investing in high school, but he’s playing it relatively safe too.

“When I was in college I played on the stock market and I lost some money,” he said. “I didn’t know what I was doing. I decided to let the people with the retirement account do that.”

Miller and his wife both participate in retirement accounts through their jobs with about 90 percent invested in stocks, about the amount Phillips recommends. They contribute monthly to their savings account and bought a house as well, though real estate as an investment is no longer an easy alternative to the stock market.

“In the past my clients have said, ‘Why should I be in the market, I can put my money in my house and it’s going to grow,’” said Chirag Chauhan, partner and director of financial services for The Barnett Group. “But we’ve gone through a period of time when housing values have dropped. The old thought was that your house can never decrease in value.”

Other Gen Ys like Daniel Lynn, a 28-year-old recording engineer who works as a contractor, found that real estate was out of the question altogether because of stricter loan requirements following the subprime bust.

His primary income comes from contract work, which is difficult to prove, and supplemented by part-time work as a bartender and an assistant at his church. Lynn does invest in a couple of companies but said his No. 1 priority is still building his savings account while his career grows.

“The chances are bad that (the market) could fall down again,” Lynn said. “I guess it’s a risk you have to take. My career and trying to build a name in the recoding industry, that’s really my priority.”

Of course Gen Y’s mistrust in the stock market was bolstered by the deception of Wall Street firms whose executives made millions while their clients went bankrupt.

“It’s the bad publicity about the big financial firms and how they screwed everybody over – that’s what turned me off of it,” Miller said. “Everybody works hard for their money so I would much rather see my money put into something (safer) even if it’s only getting a percent and a half, at least I know it’s going to be there.”

“They’re realists,” said Jeanette Young, a career investment adviser, former floor trader, and blogger known as “the Option Queen.” “I have to say to people like that, while it is true that you will face emergencies, there are ways we can get around these things.”

Echoing Hass, Young said that while Gen Y is the most educated generation ever, in general finances – and especially investing – they remain illiterate.

“My 24-year-old now understands because I’ve shown him how it works, but how many moms are investment specialists?” Young said.

She said that the better options for stock market newbies, which will allow them to compound their savings over time, look less like video game-style Internet day-trading. As for Gen Y’s potential, Young compared today’s situation with the early 1980s when she had to convince investors to part with their money after the mutual funds implosion of the 1970s.

“(Their earning potential) is huge, but they don’t see it yet,” Young said. “They don’t have confidence in staying in their jobs, and a great deal of them are under-employed, so they are going to squirrel away their money in a mattress. I think they will come into (the stock market) slowly.”

But Phillips said don’t be surprised if the generation gets a wild hair sometime in the future. This is Gen Y, after all.

“There’s one good thing about Gen Y, we’re the changers,” Phillips said. “Not only will we change, we have to change.”