"The Lost Generation" or "Survivors of the Great Recession"? A Financial
Expert Explains How the Under-40 Crowd Can Get on Track to Financial
Independence Despite the Slow Economy
By John Vento
Go to a good college. Get a high-paying job. Then you'll be set for life.
These simple instructions sum up the financial advice that a whole
generation of Americans was given growing up, as visions of big houses,
fancy cars, and carefree living danced in their heads. Of course, the
reality for Americans under 40 is proving to be much different. Mountains of
student loan debt, unemployment lines, and barely getting by have resulted
from a Great Recession and slow economy that have stifled what has been
dubbed the "Lost Generation" before they could get a solid financial
foundation under their feet. In fact, a new study from the Urban Institute
shows that the average wealth for Americans under 40 is 7 percent less than
for those under 40 in 1983.
There is a brighter side to this coin. This generation will learn from these
economic hardships and can therefore set up more financially stable lives in
the long term.
Just look at how the Great Depression generation reacted to that harsh
The clients I work with who grew up during that time know the value of a
dollar. To this day, many of them live very conservatively because they
understand what it feels like to not have some of the necessities of life.
Today's survivors of the Great Recession will learn the importance of making
sound financial decisions because they won't be able to get by otherwise.
They understand there is no such thing as guaranteed employment and as a
result, I think, many of them will have a greater appreciation for the value
of financial planning. What's more, they have the benefit of having seen
what results from living on credit and excess. They've seen what happens
when bubbles burst and how long it takes to dig out of a stock market crash.
My new book,
Financial Independence (Getting to Point X): An Advisor's Guide to
Comprehensive Wealth Management, focuses on helping readers from all walks
of life reach financial independence. It is a complete resource for anyone
concerned with building wealth and financial security in today's
no-guarantee financial environment.
Of course, it won't be easy for these young people. Many of them have to
overcome significant student loan and credit card debt. In addition,
unemployment and stagnant wages may have stifled their ability to save for
retirement or to purchase a home. But just as many in the Great Depression
generation survived by living conservatively and saving at every turn, the
survivors of the Great Recession can still build up sound financial futures
by doing the same.
Below I provide a few tips for the "Lost Generation," which I prefer to
call the "Survivors of the Great Recession," on how to get their finances in
order and start building wealth for a brighter future.
Make financial literacy a priority. Financial literacy means having a firm
understanding of fundamental financial concepts and strategies and the
ability to manage money responsibly in order to ensure financial security.
Truthfully, I think a course in financial literacy should be a core
requirement in high schools and universities. Such a course would provide
essential knowledge in personal finance that today's young people simply
don't get anywhere else. But since such courses are the exception instead of
the rule, it is imperative that young people find other ways to become
financially literate. After all, a lack of financial literacy is in part
what led to the recent financial collapse.
Many Americans simply didn't have the financial knowledge needed to
manage their finances in a responsible way. They took out mortgages they
couldn't afford. They made risky investments. They spent every dime rather
than saving for a rainy day. When you have financial literacy, you can
manage your money in a way that sets you up for long-term security. You know
how to save, how to approach your taxes, how to make decisions regarding
purchasing real estate and saving for retirement, and so on. Having this
knowledge is the first step to reaching financial independence, and that's
why I tried to make Financial Independence (Getting to Point X) as
comprehensive as possible when it comes to learning the essentials that lead
to financial literacy.
Live within your means. In my book, I establish that every hardworking
American has the ability to save and ultimately become a millionaire if they
follow certain wealth-building principles. Even with the challenges they
face, the "Lost Generation" is no different. The first step for them is to
live within their means.
Real wages for young Americans are stagnant at best and decreasing at
worst. Clearly that's negative. But it can be overcome if you simply accept
that your standard of living will have to be lower than that of the previous
generation. And that's okay. A lower standard of living does not have to
mean a lower quality of life; the two are independent of one another.
The single most important step any individual must take to become
financially independent is to commit to living within his or her means. In
addition to living within your means, if you are ever going to reach
financial independence, you must also save money. Therefore, "living within
your means" must include not only such necessities as shelter, food,
utilities, and clothing, but also payment into your personal savings.
Ideally, that payment should be 10 percent or more of your gross pay. A
great way to start out saving is to find ways to save $20 or more per week.
I offer 101 ways to do just that in my book. Remember, the biggest asset you
have is time. If you tuck away that extra $20 into a savings account every
week, at the end of the year, you will have $1,040. If you are 30 years old
and invest that additional $1,040 for 35 years (until you are 65) at an 8
percent rate of return, you will have $179,209. If you are able to save $20
or more per day ($7,300 per year) for 35 years at an 8 percent rate of
return, you will have $1,254,466.* It's amazing that is all you need to do
to one day become a millionaire. The trick is to stay focused and believe
that being financially independent is possible.
Get a handle on student loan debt. Managing student loan debt must become
a top priority for those under 40 (and anyone still working toward paying
off their loans!). Many people in this age group have opted to remain in
school because of the stagnant job market. That means they've taken on more
student loan debt than they otherwise might have had the economy been
better. This trend has to end. I understand that the job market is very
tough, and many recent college grads simply can't find work doing what they
want to do. But accruing more and more student loan debt to continue their
education isn't a good solution. My suggestion is to take a job, any job,
and stop adding to your student loan debt. A job that pays $25,000-$30,000 a
year is better than no job at all. With time and patience, you may be able
to move up the corporate ladder, and hopefully your salary will move up with
You should also put a plan in place, right away, for paying off your
student loans. Speak to each lender and try to get your rate reduced and the
terms extended. Consolidate debt where possible, extend the number of years
for payment, and lower the interest rate. In later years when your financial
situation improves you can always pay down these loans. And always pay your
student loans on time, every time; not doing so will have a negative effect
on your credit score, which will only make your financial picture worse.
Pay yourself first. Regardless of age, everyone should always focus on
paying themselves first. That is especially true of today's under-40
If you're employed, set aside 10 percent or more of your gross earnings
by contributing to an employer-sponsored retirement account such as a
401(k). If your employer does not provide a retirement plan savings vehicle,
then open up an individual retirement account (IRA). Once again, make sure
you put 10 percent or more into this account with a maximum of $5,500
allowed for 2013 for those under the age of 50. After you have done this,
you have now succeeded at paying yourself first. Doing this allows you to
then determine your standard of living. You can spend only what you have
left after funding your retirement savings and of course paying the related
taxes. Paying yourself first and saving for the future is not a choice; it
is a necessity and must come before all of the other unnecessary wants in
life. Will this be easy? Of course not, but anything that is worth something
is never easy.
Don't rush into buying a home. Because of the financial hardships they've
experienced as a result of the Great Recession and the economic downturns
that came before it, members of the "Lost Generation" are also having
difficulties buying a home.
Part of the American Dream is owning your own home. And that is all well
and good, but we saw during the housing crisis what happens when people
purchase homes they can't afford. Young people should not rush into buying
property. Anyone who can't put down 20 percent toward the purchase of a home
should keep saving and wait until they can before buying. It's okay to rent
an apartment or even live in your parents' basement if that's what makes
sense for you financially. In fact, I lived in my parents' basement until I
was married and able to afford a home.
That said, for those fortunate enough to have saved enough for a down
payment, the timing of purchasing a home could not be better. This is a
terrific opportunity for this generation since property values across the
country are significantly lower than in 2008, and interest rates are at a
historical low. The benefits of home ownership are significant, which
include the deductibility of real estate taxes and mortgage interest as well
as points paid on the initial purchase. The key here is to purchase a modest
home, one that will provide shelter, not one that will provide you with
bragging rights among your friends and family. It is much better to own a
$300,000 home with a $100,000 mortgage than it is to own an $800,000 home
with a $600,000 mortgage. Remember, live responsibly and save.
Avoid using credit cards. Many young adults in this generation have
accumulated lots of credit card debt. Credit card debt is the financial
equivalent of having terminal cancer. It is a surefire way of killing your
chances of becoming financially independent. The only reason people have
credit card debt is because they have spent more money than they earned.
Sometimes this is necessary, such as in cases of a medical emergency, but
the majority of the cases of credit card debt come from living
irresponsibly. Remember, if you spend more money than you make, the only way
to make up the shortfall is by going into debt. This vicious cycle must end
and it must end immediately.
First and foremost, throw out your credit cards. Instead use cash or a
debit card. Guess what? If you don't have the money in your account, then
you cannot purchase the things you want. Another possibility is
renegotiating with the credit card companies. Often you can come to an
agreement to eliminate some of this debt for pennies on the dollar.
If you have an extreme amount of credit card debt"for example, if your
overall debt exceeds your assets"then you are considered insolvent. If this
is the case, you may want to consider filing for personal bankruptcy.
(Unfortunately, student loans typically cannot be wiped out as part of
bankruptcy.) Although this will ruin your credit for at least seven years,
it may give you a fresh start and will allow you to start rebuilding your
finances from ground zero. Of course, anyone can avoid these problems by
simply avoiding using credit cards.
We have just gone through a horrific decade when it comes to economic and
financial matters. The choices and decisions the under-40 generation makes
now and the lessons they have learned will have a direct impact on their
futures. Will this generation have to change their goals and expected
retirement age? Most probably yes. Will they live high and mighty and as
irresponsibly as the previous generation? I certainly hope not. The key for
them will be to stay focused and understand the basic principles of becoming
To sum it all up, work hard and earn an honest living. Always live within
your means and pay yourself first by contributing to your retirement plan
and taking advantage of the associated pretax savings. Throw away those
credit cards and stop adding additional debt. Focus on increasing your
quality of life, not your standard of living. I am optimistic about the
future of this generation. Their path may be much different from the one
they envisioned growing up, but by following established wealth management
principles, they can absolutely reach financial independence.
# # #
* The rates of return shown above are purely hypothetical and do not
represent the performance of any individual investment or portfolio of
investments. They are for illustrative purposes only and should not be used
to predict future product performance. Specific rates of return, especially
for extended time periods, will vary over time. There is also a higher
degree of risk associated with investments that offer the potential for
higher rates of return. You should consult with your representative before
making any investment decision.
About the Author:
John J. Vento is author of
Financial Independence (Getting to Point X): An Advisor's Guide to Comprehensive Wealth Management (Wiley, 2013, ISBN: 978-1-1184-6021-4,
$40.00, www.ventocpa.com). He has
been the president of the New York City-based Certified Public Accounting
firm John J. Vento, CPA, P.C., and Comprehensive Wealth Management since