Millennials – the term representing young adults born between 1984 and 2000 – is arguably one of the most used, or overused, words in a marketer’s vocabulary.
While we know quite a lot about millennials globally, associating them with terms such as ‘tech-savvy’, ‘self-absorbed’, and ‘free spirited’, we know relatively little about young adults in South Africa. Some are first-generation ‘born frees’ who have an unusual history, face unique challenges and have their own take on the world.
Old Mutual commissioned its Millennial survey to better understand the financial behaviour of employed millennials versus older generations surveyed in its 2017 Old Mutual Saving and Investment Monitor.
As is the case globally, the first message to come from the research was ‘Ignore them at your peril’.
In South Africa 16.3 million people are working in some way – and about 7.1 million are millennials, or 27% of South African consumers, making them one of the most significant demographic groups in the country. “That is massive,” says Elize Botha, MD of Old Mutual Unit Trusts. “They really matter.”
Yet financial planners ignore them. And turns out millennials couldn’t really care, opting to trust their own decision-making instead.
This is not to say that they are not financially aware. They are. In fact millennials are more likely to seek financial independence and personal fulfilment than older generations. The research showed that 24% of millennials are currently invested in a unit trust – versus only 2% among older generations – with 57% of millennials saying they invested in a unit trust with the purpose of increasing their net worth, and 47% saying they looked to invest to reach financial freedom.
However, many millennials’ investment decision-making ability is misguided, and their understanding of financial freedom is skewed, with most viewing it as the ability to walk into a shop and buy what they wanted.
Perhaps it is unsurprising then that the survey also revealed that 35% of millennials – the first generation to reap the fruits of democracy – were saving money to pay back debt (this number was 13% for older South Africans).
“Millennials are facing unique financial challenges that make them susceptible to debt,” says Mapalo Makhu, a millennial and personal finance coach who founded the financial coaching firm Woman & Finance. “Many first-generation middle-class South African millennials are playing ‘asset catch up’ – purchasing appliances and motors vehicles on credit – while caring for financially dependent relatives [other than their children], which creates a tension between the expectations of family and dreams millennials have for their own financial future.”
When it comes to savings priorities, the research also showed that millennials are more likely to save – in order of priority – towards travel (37% versus 10% of those surveyed in the Old Mutual Saving and Investment Monitor), their education (31% versus 4%), a car (32% versus 11%) or starting their own business (23% versus 3%).
“Millennials are obsessive about education,” says Makhu. “Our parents have raised us this way.”
Old Mutual Investment Group MD Khaya Gobodo says they are also saving to go into their own businesses. “The sheer number is what is unusual. What we are seeing is young people with three or four income streams. This is one clearly observable difference between that generation and those of us not in that generation. In some cases it’s for the cash. But for millennials it’s also the flexibility.”
Botha believes this shift in priorities speaks to the bigger differences in the way millennials and older generations view money, as well as the unique challenges millennials face. “We [as the industry] need to take hands to change the reality of millennials out there. They are making decisions that will not take them to where they want to be.”
She points out that complete financial freedom – and the flexibility it offers in terms of being able to travel or start a business – comes when a person’s income from their assets exceeds their expenses. But at this point millennials are living as if they can have it all. “Only by reducing debt in tandem with investing in investment vehicles which offer growth assets and returns can millennials hope to reach this goal,” she says.
Makhu agrees and says that unless millennials address their high levels of debt, they will struggle to reach their goal of financial freedom and independence. “My aim is to instil the principles of financial freedom among my friends. They were shocked that I did not have a credit card or overdraft. Financial freedom doesn’t happen without a plan. Yet millennials are optimistic and believe it will just fall into place.”
Botha explains the four pitfalls millennials face on their journey to financial freedom:
High levels of debt
Debt, typically in the form of personal loans, is often used to buy things that will be consumed, such as appliances, clothes, or items that tend to depreciate over time. The survey revealed that 64% of millennials had a personal loan and that 35% of their income was spent on servicing the interest on debt (compared to 14% and 13% among older generations respectively).
Saving, rather than investing
According to the research, an alarming 47% of millennials – nearly half – did not know what a unit trust is. And almost 61% were saving money in a bank account, suggesting they don’t understand the difference between saving and investing, or that their savings priorities are very short term in nature.
Keeping up with the Kardashians
The third pitfall is overspending – often using expensive credit – to buy the things we absolutely ‘need’ to appear successful. “Constantly increasing your credit limit as your income increases to keep up with the expectations of friends and family only serves to keep you further away from reaching your goal,” says Botha.
Not defining their values
“Without a clear goal most people will find themselves spending rather than saving. Every person is unique, and our relationship with money is often complex. An understanding of your intrinsic values is also essential to find the resolve to achieve financial freedom.”
While investing enough money to be financially free may feel like a long shot, Botha advises millennials not to be intimidated and to start small. Once they’ve achieved a milestone, they will be more motivated to reach the next, and bigger goals won’t seem so unattainable. “Start today,” she says.
Sasha Planting is Moneyweb’s deputy editor and writes on investment and companies. While the output of labour and capital – wealth creation – is important, she is more interested in the people that enable wealth creation.