The demands placed on young people by the Covid-19 lockdown seem scarcely comparable with the historic crises that have hit the British population in war and peacetime. Serve your country by sitting at home, sipping a “quarantini” and watching Netflix? It sounds fair enough.
But scratch beneath the surface of this enforced domestication and you will find widespread financial anguish among Generation Z and millennials, who have paid a heavy price for having to protect their elders.
Covid-19 has had a disproportionate impact on those of working age. Younger adults aged 18-34 and the self-employed last year saw the largest proportional increases in financial vulnerability, rising by more than 40 per cent, according to the Financial Conduct Authority. Other data show how those under 40 are more likely than older people to have lost work and income, tumbled into debt and arrears, drawn on their savings and been forced to duck out of pension contributions.
Given the economic uncertainty ahead, things could get a lot worse before they get better. And yet, something exciting is happening. In the decade I have been writing as a millennial about my generation’s money problems I have never before witnessed so many young people decide they want to take control of their finances.
More readers than ever are contacting me to share their hopes and frustrations. There is Ava, a screenwriter, who kindly says that reading my financial advice blog had given her the confidence to start saving for her first home. But there is also Ashleigh, recently let go from her dream job in fashion, heartbroken at having to use up her savings and desperate to get back to being “self-sufficient” once more.
What they all have in common is a determination to develop what Ava called “ownership” of their money by acquiring security and a more meaningful stake in the financial system. That desire is what motivated me to write a book drawing on young people’s experiences (including my own) and data showing a flowering of financial interest — even if it is not always channelled in the right way.
The Covid generation is waking up to the extraordinary economic, social, and environmental predicament they find themselves in and sensing the need to do things differently. This change is clearly noticeable in their financial behaviour.
Gen Z and millennials
Writing about young people’s money issues has taught me that, to quote Alexandre Dumas: “All generalisations are dangerous, even this one.” Generation Z, aged up to 25, and millennials, aged 26 to 40, are richly diverse cohorts, with many differences within and between one another (check out the recent “diss-track” war on TikTok, where millennials and Gen Z mock one another in homemade videos). But clear-cut trends are emerging.
Gen Z is coming of age not just in the Covid crisis, with a jobs crunch awaiting school leavers and graduates, but also amid a fintech revolution. The cohort is increasingly comfortable with digital banking, spending and borrowing, with a strong entrepreneurial streak: see the rise of clothes-selling app Depop and its army of precocious retail tycoons. And Gen Z members embrace saving, with 72 per cent of this group saying they would take £1,000 and put it in the bank, compared with 55 per cent of millennials, according to an HSBC survey.
Izzy Rose, 22, works in marketing after graduating last year and says she was lucky to get a job quickly. But many of her peers were not so fortunate. “It really opened my eyes to the fact that I’ve got this opportunity now but who knows what tomorrow brings? That’s why I want to have a back-up plan.” She budgets “quite carefully” to save £100 a month in a digital savings pot tied to her bank account but “ideally” wants to raise that to £300 a month.
Younger savers also see taking financial control as a way to make capitalism more accountable and to erode gender and racial inequalities. “Saving, for Gen Z, might well become a political act,” says Eliza Filby, a historian specialising in the study of generations and a former lecturer at King’s College London. “They’re generating different habits when it comes to shareholder activism and have a determination to learn from millennials’ mistakes.”
Millennials acquired a reputation after being demonised for prioritising what Filby calls an “experience-driven” lifestyle over acquiring assets. But low-cost travel and happy-go-lucky socialising are currently on ice. Despite suggestions that there will be a post-lockdown spending boom — valued at £50bn in a study by financial services group Scottish Friendly — Filby believes a “long-term shift” towards a home-centric culture is under way.
She says: “When restaurants and festivals open up these will inevitably become more expensive pursuits. The changes we are seeing in our working lives will have a profound knock-on effect for how young people live and therefore spend.
“For many millennials, the one-bed sleep pod near a nice coffee shop no longer has the same allure it did pre-pandemic. Suburbia is calling.”
Saving not spending
Duncan Lamont, head of research at Schroders, an asset manager, believes millennials’ reputation for being a generation of spenders “who don’t think about the future” has been unfair for some time. He points to the 2020 Schroders Global Investor Study, which found investing (outside a pension) was the number one goal for millennials’ disposable income over the next year. Saving into a pension was the second most popular answer, while spending on holidays and car purchases was down in fifth place.
Duncan says: “This is not a blip which can be explained by lazy tropes about bored individuals sitting at home betting on stocks for entertainment. It’s a trend that has been taking place over several years, well before anyone had heard of coronavirus.”
Poor interest rates are a big factor in explaining millennials’ interest in investment. Samson Dada, 29, says he is a long-term saver who has built up a “decent” balance over the years, but was dismayed when his bank cut his interest from £7 a month to £3.98. His rate is now 0.23 per cent compared with a rate of 1.5 per cent when he opened the account in February 2020.
Samson, who works in public relations, wants to do more with his money to fulfil his goals, which include a deposit on a first home, being “comfortable” and having a financial cushion in retirement. “Covid-19 demonstrated that we have to be prepared for anything. Those with decent savings like myself have to make our money work smarter to realise our goals.” The key issue, however, is where to find “the most credible information”.
Such information is not always easy to come by. Research from think-tank Common Vision uncovered a widespread need for financial information that addressed millennials’ “specific concerns and life stages” amid a growing wariness of what can be found online. Information was most useful, it found, when relevant; tangible; relatable; personalised; low cost; impartial; and peer-verified.
One 23-year-old interviewed in the report said: “I find it hard to trust online information about financial products and services. Even if the website is fairly well-known, I don’t know whether the information is up to date. Comparison sites don’t always tell me what I need to know.”
One development that raises hope is Open Banking, a finance industry initiative that allows banks, building societies and other financial services firms to offer tailored products based on our data (with our explicit permission). As it takes shape, it could provide insights that help us reassess our financial behaviour for the better.
Yet sorting the wheat from the chaff of fintech launches may be a challenge. Caroline MacFarland, founder of Common Vision, says a wave of new apps and financial products appear to offer a solution to the problem of taking financial control but are often nothing more than a marketing tactic.
“If financial services took this opportunity [presented by Covid] to champion the importance of being financially confident and resilient, and how this can help an individual’s personal wellbeing, that could prompt more young people to examine their circumstances and be more proactive about their choices.”
A key aspiration shared by many young people, Izzy and Samson included, is a desire to save or invest for a first home. Izzy says it’s her “number one” goal.
But the financial services industry often voices concern that the homebuying dream leads young people to neglect their pensions, and not without justification. The savings required to put down a deposit have grown ever larger in recent years, with house prices rising by 8.5 per cent in 2020 alone, according to the Office for National Statistics. That can leave a lot less available for retirement saving.
Workplace pension schemes provide a base level of saving but those making the minimum contribution will not achieve the kind of comfortable lifestyle enjoyed by many retired baby boomers today, often buoyed by generous final salary schemes that are fast dying out. Some of the wealth amassed by previous generations may find its way to younger ones through the Bank of Mum and Dad, an increasingly important source of funds for some — but these transfers tend to exacerbate existing inequalities in society and cannot serve as a solution for all.
One problem is that young people will start prioritising their pensions only once they feel financially “grown-up”, according to research conducted by Hayley James at the Manchester Institute for Collaborative Research on Ageing. Getting a pay rise, setting up an emergency savings pot, getting on the housing ladder are all viewed as necessary foundations for adult life. But for most, pensions saving comes later.
Since the average age of first-time buyers in the UK has nudged up to 31 over the past 10 years, that attitude could mean a lost decade of pension saving that cannot be made up later, with young people also missing out on the long-term magic of compound interest.
The decision to stall pension saving also brings other costs: research from the Investing and Savings Alliance found that “lifetime” renters of property will need an extra £9,000 of annual income to cover rental costs compared with homeowners — meaning they will have to save nearly twice as much into their pension.
A straight choice between pensions and a home is, therefore, nothing of the sort. Young people should work towards both — while also investing towards other goals, whether they are aiming to retire before the age of 55 or building a nest egg for their future children. This may sound like a Herculean task, but using the right technology and products can help, as well as having a firm grasp of the numbers (see box).
New savers such as Izzy could use a financial chatbot like Cleo or Plum, which can identify extra wriggle room for savings. Izzy and Samson should also think about income protection. This insurance is cheap for young people and provides long-term financial support should you need a prolonged break from work due to mental or physical illness. This will cover you beyond your emergency savings and sick pay, which lasts up to 28 weeks.
They could look at a Lifetime Isa to build their first home deposit. They will get 25p from the government for every pound they save; the maximum annual bonus is £1,000. It blows all other savings accounts out of the water as long as you don’t touch the money before you come to buy (expect a big penalty for early withdrawals).
Of course, the pandemic has left many young people depleting their savings, not building them up. According to research by brokerage Hargreaves Lansdown, one in three young people had to dip into their cash reserves during the crisis. But it also found one in four people had more money to save, as their travel and entertainment expenses fell away. This contributed to a 27 per cent rise in the number of people taking out a Lifetime Isa with Hargreaves in the year to the end of February, it says.
Investing or speculating
The Lifetime Isa is an unusual hybrid: you can either put it in cash or invest it in the stock market. The latter is only advisable if building your deposit is likely to take at least five years and you’re genuinely comfortable with the risks of investing — which include losing your money altogether.
Understanding this is crucial. There has been a boom in young DIY investors over the past year, but research published last month by the Financial Conduct Authority found 45 per cent of them do not view losing money as a potential risk of investing. Yet 60 per cent admitted that a significant loss would damage their current or future lifestyle.
The young investors’ dilemma is a microcosm of the question our whole society faces in the age of Covid. How do we strike a balance between being excessively cautious and too gung-ho? After all, long-term returns on stocks and bonds, the main asset classes in investing, could be substantially lower than those of previous generations, according to Credit Suisse’s recent global investment returns yearbook. If that’s the case, the easy wins of the post-2008 stock market in shares such as Tesla may well come to an end.
In this environment, a hunger for better returns is likely to push some young investors into risky online financial areas, lured by fabled guarantees of high returns in a short space of time. Examples of warped expectations include the frenzied atmosphere around bitcoin and so-called “meme stocks” such as Gamestop.
The answers to these temptations are, reassuringly, timeless. Develop a diversified investment portfolio covering various regions, sectors and investment styles: well-managed investment trusts and exchange-traded funds will help. Avoid high charges that eat into your returns. Start early, tune out the hype and stick with it.
Iona Bain’s “Own It: How our generation can invest our way to a better future” is published by Harriman House and is on sale now.
Making your pension savings go further
Izzy and Samson are both automatically saving into workplace pensions, getting free money from their employer and tax relief from the government. It’s a good start, but they should ask if “contribution matching” is possible.
According to Aegon, a 25-year-old on average earnings could boost their pension pot by £43,900 at state pension age if they contribute just 1 per cent above minimum rates with an extra 1 per cent chucked in by their employer (making a 10 per cent total contribution). This assumes wage growth of 3 per cent and investment growth of 4.25 per cent after charges.
Otherwise, a good guide to how much we should really be saving into our pension is available at Retirementlivingstandards.org.uk. Your average 25-year-old who sticks to the default contribution of 8 per cent (with £8,500 in their pot so far) will produce an annual retirement income of £16,678.
This means they can only afford a £38 weekly food budget and UK coach holidays. But if they increase their contributions to 12 per cent (or £106 extra a month), they could one day go more upmarket in their weekly shop and go on holidays abroad.
This is a useful way to see past the steep contribution targets thrown around by some experts who assume everyone wants a lavish, globe-trotting retirement. Maybe they do, maybe they don’t (especially if they are trying to be more eco-friendly). The point is you can decide for yourself, then save accordingly.