THEY have the world at their fingertips. Equipped with impressive paper qualifications and armed with a competitive edge, Generation Ys’ easy access to technology and all things fast, flashy and fun means that they can easily have the lifestyle of their dreams.
However, many Gen Ys, also known as millennials (those born between 1980 and 2000), are trying to stay financially afloat even before buying their first car or dream home, tying the knot or starting a family.
Some believe it is because Gen Ys were pampered by Gen X (those born between the 1960s and early 1980s) parents, who want to give their children a better life.
A new Asian Institute of Finance (AIF) study reveals that Malaysia’s Gen Ys experience significant financial stress early in their lives, with many living beyond their means and trapped in emotional spending.
It highlights that the majority of respondents live on credit, with 38 per cent taking personal loans and 47 per cent living on high-interest-rate credit cards. Worryingly, only 28 per cent claim to know how to manage their finances.
The study, titled “Finance Matters: Understanding Gen Y — Bridging the Knowledge Gap of Malaysia’s Millennials”, saw the participation of more than 1,000 professionals aged between 20 and 33.
AIF chief executive officer Dr Raymond Madden says Gen Ys, despite being the most educated generation, accrue debt at an earlier age and lack understanding when it comes to financial planning.
“Our research indicates that many of them are on the back foot when it comes to long-term financial security, as they accrue debt before they even enter professional careers.
“Managing money well and making sound financial decisions are essential skills that must be learned over a lifetime to ensure financial fitness in the future.”
With the ever-increasing complexity and diversity in financial products and markets, Madden says, millennials are more likely to bear more financial risk than previous generations.
“This points to a critical need for behavioural changes in money management.”
The study shows that Gen Ys make up the largest consumer pool with a high spending power.
However, they lack confidence in financial literacy, with 58 per cent admitting to having “average” financial knowledge.
The study finds that 75 per cent of respondents have at least one source of long-term debt, such as car loan, education loan or mortgage, while 70 per cent own credit cards and tend to pay the minimum monthly payment, with 45 per cent failing to pay off debts on time.
As a result, they stay in debt, using credit-card lending much longer than intended.
When it comes to financial planning, only 37 per cent seek financial advice from professional planners.
Of the total, 26 per cent say they trust the advice received.
Material desires
Financial consultant Rajen Devadason believes that there are two reasons for such Gen Y behaviour: one extrinsic and the other intrinsic.
“External factors, such as ridiculously expensive houses and cars, coupled with disproportionately low starting incomes, mean that there isn’t enough money to pay for their desires,” says the Securities Commission-licensed planner with Manulife Asset Management Services.
“The high price of real estate in urban centres, where most jobs are concentrated, means that young adults need to live quite a distance from the workplace.”
He says the lack of high-quality public transport makes it a necessity in many cases for young adults to buy cars, which are expensive because of tax, tariff and duty fees.
“Internal factors include an excessive sense of self-worth arising from long-term coddling by parents, which leads Gen Ys to believe that the world ‘owes’ them a living and they are the most important people, who are entitled to the best things in life, even if they haven’t earned the right to buy things with their own money.
“When you put it all together, it isn’t surprising that young adults in the workforce fund the gap between their salaries and elevated expenses through whatever form of consumer debt that banks make available to them.”
He says in the long haul, this leads to many Gen Ys being trapped in self-dug pits of debt, from which it takes decades to escape.
Rajen, who is also CEO of corporate mentoring consultancy RD WealthCreation, says if young adults who live with their parents are trained to contribute to household expenses, they are more likely to learn good financial habits.
“It will make them filial to their ageing parents and enable them to operate within a self-determined budget, which helps them save and invest regularly.
“Unfortunately, those whose parents don’t require them to pay for expenses at home tend to grow up assuming that their money is their own to fund their ‘wants’, while their parents continue to pay for their ‘needs’.”
Vicious cycle
The availability of consumer debt through personal loans and credit-card purchases will, for some time, allow Gen Ys to live beyond their means.
“Often, this vicious cycle ends only when their incomes stop rising fast enough, causing their debts to pile.
“Usually, when that day of reckoning comes, everyone, not just Gen Ys, faces a rude awakening,” says
Rajen.
He says the best way to make regular and timely car and house payments is to get into the habit of doing so at least a year before such purchases are made.
He cites the example of a young working adult planning to buy his first car, costing RM80,000, with a RM10,000 down payment and a RM70,000 loan over five years.
The young adult will need to fork out RM1,350 in monthly instalments.
Factoring in the cost of maintaining, servicing and repairing the car over the first five years (RM300 a month); petrol (RM600 a month); and road tax and insurance (RM1,200 a year or RM100 a month), the cost of owning and operating a care works out to RM2,400 a month.
“A financially savvy young working adult who knows the importance of establishing a sound programme of cash flow management will take a hard look at his income and figure out if the car is affordable.
“If it is, then delay the purchase by one year, but start a dedicated savings programme of RM2,400 each month, which will result in RM28,800 in savings (excluding interest earned) over the following 12 months.”
He says developing the discipline to set aside money in this manner helps a person raise a larger down payment, resulting in less money borrowed and, therefore, lower interest charges incurred.
“Unfortunately, the ‘I must have it now because I deserve it today’ mindset is entrenched in the psyche of the average Gen Y consumer.
“I suspect that less than five per cent will heed my advice.”
Instant gratification
Rekindle Centre for Systemic Therapy clinical psychologist Dr Charis Geevarughese says individual, societal, environmental and historical factors may contribute to the problem.
“Instant gratification is made even more convenient nowadays, when it can be achieved via the Internet with a click of the button.
“There are many websites that allow you to purchase products online.
“This method provides temporary but instant emotional relief, which many seek.”
She says the lack of education or attitude towards resources is a contributing factor.
“Depending on the way a person was brought up, it can be easy to believe that resources are unlimited.
“Just go to any supermarket and you can see an endless supply of food items on the shelves.
“It’s only recently that people have started to think about the importance of protecting food resources,” she says, adding that family relationships and attitude towards money play a big part in shaping such emotional needs.
Emerging Adults, a concept that refers to changes in the adult developmental process that lead to different goals and priorities, plays a big role.
Charis says adults have the leisure to explore their identities and careers up to 35, which frees them from making serious decisions.
“The situation was different before. Back then, as soon as a teenager became a working adult, he had to make permanent decisions and stick to a solid career because he was the breadwinner in the family.
“There were fewer opportunities to explore one’s options and the goal was to survive.”
She believes that peer influence contributes to a person’s spending habit.
“A person’s attitude towards finances, money and possessions is mostly learned from his experience at home and in his social environment.
“Much of it also comes from personal beliefs and preferences.”
She says Gen X parents, who have experienced hardship in their lives, may hold the key to their children’s debt problem.
“It might not come from a desire to spoil their children, but an affirmation to keep them from the hardships that the parents had experienced growing up.”