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The millennial struggle with personal finance

25th Oct 2018
Commercial Production Editor AccountingWEB.co.uk
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Research shows Millennials are less financially literate than previous generations, but also more likely to use financial technology.

The digitally native millennial generation - which according to the World Economic Forum will make up 75% of the workforce by 2025 - struggles to understand basic financial language. Could accountants play a major role in helping them understand their finances and transact better, Clear Books asked in a recent AccountingWEB industry update.

Poor understanding of financial basics

Half of the 1,000 millennials surveyed by the online financial planning platform Finimize could not explain any of the financial terms in its questionnaire. The percentage was even higher (60%) among students.

The financial terms included: ISA, bonds, shorting, hedge funds, index tracker fund and derivatives. Other concepts that mystified most of the respondents took in equity (unknown by 84%) and asset management, which could only be explained by 10% of those surveyed.

Even millennials who did have savings lacked basic knowledge when it came to managing their money: more than half of  those with £10,000-£24,999 in savings (52%) were unable to explain what an ISA was.

The situation is not exclusive to the UK. The Global Financial Literacy Excellence Centre (GFLEC) compiled a 2018 personal finance index (P-Fin Index) that highlighted a financial literacy gap between millennials and the rest of the US adult population. Millennials answered 44% of the P-Fin Index questions correctly, while adults answered 50% correctly.

Millennial use of financial technology

In spite of the financial literacy gap, 53% of British millennials use mobile banking apps regularly, according to Visa. Over a third (34%) have also made peer-to-peer digital payments via a mobile device and 59% have sent mobile money to a friend or family member.

According to GFLEC, over 80% of millennials use their device for managing transactions including making payments and tracking expenses. Although 90% of millennials use their smartphones for informational fintech purposes, there is no evidence to suggest that this improves their personal finance outcomes.

How accountants can help

Alongside their financial literacy struggles, millennials are also one of the most indebted generations, starting from the moment they finish their university studies. Last year, student loan debt in the UK rose to more than £100bn for the first time. At the end of 2017-18 the total debt owed by students studying in England was £104.6bn, according to the Student Loans Company.

For millennials already in the labour market, the situation is not much better. In fact, a YouGov survey for KPMG found that more than one in five UK adults aged between 25-34 spent more than 60% of their income on the day it entered their bank account.

“There’s an opportunity for accountants to provide advice and support to Gen Y as their millennial client base grows,” said Clear Books CFO David Carr. “By using cloud-based technologies, accountants can see the finances of their younger clients and provide real-time advice to help nudge them towards better financial decisions.”

Replies (6)

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By rawa363
26th Oct 2018 11:44

I think being able to explain 'ISA's, bonds, shorting, hedge funds, index tracker fund, derivatives, equity and asset management' are poor indicators of 'financial literacy'.
In my view financial literacy for the majority should be around understanding personal debt what it is, how it arises, what it costs and how to avoid it. Interest rates and how they relate to debt and how compound interest works on a loan and on savings. How mortgages work and don't work, what an interest only mortgage actually means as a way of buying a house, how paying a little over on your mortgage payment will massively shorten the term of the mortgage (assuming it's not an interest only one). What PCP really means when 'buying' a car. How to evaluate different savings and investment options, the benefits of having a mindset of saving and waiting for things they want rather than racking up large debts and how a good understanding of living as debt free as possible will give freedom in life and help them sleep at night.

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Replying to rawa363:
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
26th Oct 2018 14:53

Thanks rawa363 - that's quite an effective manifesto for a millennial finance explained article series.

Have you attempted to educate any clients or prospects on these issues, and with what success?

I'll check with our editor, Tom Herber. This might be an area we could explore in an article or two in the future.

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By Lee6859
20th Dec 2018 00:39

Something that isn't made clear is how financial literacy changes (or does not change) over time. The way this article - and those it links to - is written heavily implies that financial literacy is unusually low in the most recent generations and that we'll be in serious trouble if we don't do something about it. However, as far as I can tell the surveys were not longitudinal (the finimize link is already dead) and so we cannot tell if "previous generations" are simply more financially literate by dint of having had longer to figure it out.

Edit: In fact here's something from page three of the GFLEC study cited above:

"The increase in financial knowledge with age is consistent with findings from other surveys
and is seen across the entire population. People are confronted with financial decisions
through their course of life which contributes to increasing the level of financial literacy."

This is born out by the smooth increase in financial knowledge found in their own graphs. It increases steadily from "Younger millennials" to "Baby Boomers" with no sharp drops or rises whatsoever. While I'm all for increasing people's education and financial literacy, this whole issue is being framed as if young people are exceptionally ignorant and lagging behind, when it looks to me like they're right on track (at least based on this data).

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Replying to Lee6859:
avatar
By Brenda48
29th Jul 2019 05:38

Lee6859 wrote:

Something that isn't made clear is how financial literacy changes (or does not change) over time. The way this article - and those it links to - is written heavily implies that financial literacy is unusually low in the most recent generations and that we'll be in serious trouble if we don't do something about it. However, as far as I can tell the surveys were not longitudinal (the finimize link is already dead) and so we cannot tell if "https://www.myfirstpremiercard.us/ previous generations" are simply more financially literate by dint of having had longer to figure it out.

Edit: In fact here's something from page three of the GFLEC study cited above:

"The increase in financial knowledge with age is consistent with findings from other surveys
and is seen across the entire population. People are confronted with financial decisions
through their course of life which contributes to increasing the level of financial literacy."

This is born out by the smooth increase in financial knowledge found in their own graphs. It increases steadily from "Younger millennials" to "Baby Boomers" with no sharp drops or rises whatsoever. While I'm all for increasing people's education and financial literacy, this whole issue is being framed as if young people are exceptionally ignorant and lagging behind, when it looks to me like they're right on track (at least based on this data).

Very valuable information, it is not at all blogs that we find this, congratulations I was looking for something like that and found it here.

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By bernice92
27th Apr 2019 05:56

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avatar
By Samuel324
22nd Aug 2019 09:59

In my view financial literacy for the majority should be around understanding personal debt what it is, how it arises, what it costs and how to avoid it. Interest rates and how they relate to debt and how compound interest works on a loan and on savings. How mortgages work and don't work, what an interest only mortgage actually means as a way of buying a house, https://www.krogerfeedback.vip/ how paying a little over on your mortgage payment will massively shorten the term of the mortgage (assuming it's not an interest only one). What PCP really means when 'buying' a car. How to evaluate different savings and investment options, the benefits of having a mindset of saving and waiting for things they want rather than racking up large debts and how a good understanding of living as debt free as possible will give freedom in life and help them sleep at night.

Thanks (0)