Journal of Financial Planning: September 2016
It’s no secret that most young professionals do not save enough, especially for retirement. According to the U.S. News & World Report article, “Why Millennials Still Don’t Save Enough,” although the majority of millennials say the recession taught them the importance of saving for the future, only 55 percent of the 1,639 millennials surveyed by Wells Fargo have started saving for retirement. And those who aren’t saving yet say they think they will be able to begin doing so at age 35.
Financial planners can work closely with young clients to combat worries about planning for the future by following a few recommendations. Planners need to make themselves available, not just at universities or in the workplace, but also to high school students. Educating high school seniors, in particular, before they attend college can be beneficial because it helps them understand the importance of money and develop an appetite to save. With this exposure before college, they will be able to borrow wisely and not be in debt after they complete their undergraduate degree.
Increasing salaries can easily lead young professionals into the trap of lifestyle inflation—seeing every raise as a chance to increase their standard of living and their consumption. Young professionals across a wide socioeconomic spectrum are vulnerable to problematic money beliefs and self-destructive financial behaviors. Financial planners can help craft strategies to help young professionals reach the long-term goal of a comfortable retirement.
Here are five recommendations for financial planners looking to help with young professionals’ money behaviors.
Workplace Education
Work with companies to establish “just-in-time” training sessions on financial planning topics for their new employees. This recommendation is perhaps best suited for planners who work in large companies or at government agencies. What if it was a requirement for all new employees at a company or government agency to participate in a 60-minute session on how to manage their money? Topics could range from 401(k) strategies, a high-level comparison between Roth and traditional IRAs, identifying money behaviors, or letting new employees know about different investment options. During these sessions, planners could share information or warnings about areas where young professionals could potentially encounter financial problems. For example, if employees live in cities with casinos, then employers should make them aware of the perils of gambling.
“Just-in-time” training is appropriate for new employees, especially when they are receiving a new salary and not sure what to do with their new income when it comes to retirement savings. Financial planners can introduce young professionals to the aforementioned topics because it is remarkable how many people in the workforce are not investing in their future. Millennials, however, may be doing a better job at saving than previous generations. Many millennials, including myself, learned good financial lessons from their parents or older generations struggling with money management.
College Courses
Share your expertise with college undergraduates to emphasize the importance of managing money when entering the workforce. Universities can team up with companies to have a section of a class for graduating seniors to talk to financial planners. To have access to a financial planner could have been extremely useful for me entering the Air Force at my first base. After talking to a few of my fellow officers, a majority of officers also struggled with managing their income. At first, officers think they have enough money to be irresponsible but then realize they are not covering all their bills. This results in Airmen borrowing money to pay their bills or not paying bills at all. Financial planners may need to reach out to young professionals before or just as they are starting their careers in order to be effective.
Behavioral Finance
Get trained in an aspect of behavioral finance. Although some bad money habits can disappear with maturity, some money habits need extra attention. The focus should to be on compulsive buying and the lack of accumulation of wealth among young professionals. When young professionals start making a solid income, it is possible that they do not see the need to save because the income will be replaced next month. If young people can meet with CFP® professionals to talk about what they should do with their extra cash and learn different ways to invest, they might avoid destructive money disorders.
Open Dialogue
Remind clients to not be scared to talk about money issues with other family members, particularly with their spouses. Clients may get offended, even with financial planners, when they talk about money issues, and many families subconsciously avoid the topic. For a planner to help with this, it is imperative that he or she has some education and exposure to financial therapy. Then, planners can use the techniques learned from various experts in the field, including Bradley Klontz, to help clients with destructive behavioral issues like binge shopping, buying unnecessarily, and living above their means. With behavioral finance experience, planners can help clients lower their debt and save more. Ignoring this issue or being embarrassed about having debt problems may have damaging effects on family units, and that is why it is critical for financial planners to be able to identify clients who are ashamed to talk about money using financial therapy.
Past Behavior
Use the solution-focused financial therapy (SFT) model to help clients understand past behavior. Without getting into too much academic theory, SFT helps clients focus on future goals (see Financial Therapy: Theory, Research, and Practice edited by Bradley Klontz, Sonya Britt, and Kristy Archuleta for more information on SFT). If young professionals can understand that planning for the future is more imperative than having money in the present, they will likely have a healthier and better life.
Looking to the Future
Financial planners and scholars of financial therapy should continue to target audiences such as millennials and young professionals to help them become more financially independent and to save more for the future. If young professionals are educated earlier on the importance of personal finance and on the benefits of saving for retirement early, they will likely be more financially secure. Financial education during the end of their undergraduate studies or at the start of their first full-time job, and learning the importance of understanding how finance works from a psychological standpoint, may pave the way for young people to live financially healthy lives.
Captain John N. Concepcion is the Deputy Chief of Program Control for the Mission Processing Special Project Office, Ground Enterprise Directorate at the National Reconnaissance Office in Chantilly, Virginia. He received his master’s in personal financial planning from Kansas State University.