In today's episode, producer Jon Gay is in for RJ King. He and Lou Melone are joined by Certified Financial Planner Branden Carney to talk about financial planning for those under 30.
Financial education is not often focused on those between the ages of 18 and 30, despite the fact that this age range can include some of the most consequential financial moments of your life - from buying a house and getting married to having kids and more! Often, those under 30 are simply told "do this or else."
A lack of experience, when combined with a rapid rate of change, can sink a young person financially. This is why it's best to create a financial plan. Also, we go back to behavioral investing. Not only are circumstances conspiring against you under 30, biology is too!
Functional MRI (FMRI) studies show that when a young person is thinking about their future self, the brain behaves as if it's thinking about a completely different person. It disassociates that "future" you with the "current" you. Lou explains.
Branden talks about younger folks using the word "time." Time is a luxury they think they have. There's also herding and optimism, which may lead to a sense of invincibility, or not needing to worry about money.
Where are younger millennials and Gen Z getting information? Well, largely from social media. Most financial advice marketing is targeted toward folks that are much older. This is a trend that needs to change. So does the fallacy that a million dollars is some magic number for retirement.
We also touch on young entrepreneurs who may be focused on the short term, and naive investors who are hoping to strike it rich by buying the right stocks. There are major pitfalls to both.
The best thing is to work with a financial advisor or CFP that can create a personalized plan for you early, that you can stick to.
In our next episode we will cover real life horror stories of bad financial behavior.
Resources:
Lou Melone's book, "Unpack Your Financial Baggage:" https://www.amazon.com/Unpack-Your-Financial-Baggage-Misconceptions/dp/1948237776
Melone Private Wealth Website: https://www.meloneprivatewealth.com/
D Business Magazine Website: https://www.dbusiness.com/
Jon: Welcome to Unpack your Financial Baggage, where we help you answer one simple question, will you outlive your money or will your money outlive you? Here are your hosts, certified Financial Planner and managing partner of Melone Private Wealth. Lou Melone, and editor of D Business Magazine, RJ King. I'm Jon Gay. I produce the podcast. I'm filling in for RJ King today. Hello Lou. How are you?
Lou: I'm doing good. It's nice to be back for another discussion. How are you doing yourself?
Jon: I'm great. Today we're joined by a member of your team, Branden Carney, who is also a certified financial planner. Welcome Branden.
Branden: Thank you for having me. It's great to be here.
Jon: So we have Branden with us to help give perspective on how younger generations perceive wealth planning and retirement. Brandon is a member of this younger generation and we look forward to his perspective. So a lot of themes about the young people we already know. One is lack of a retirement plan.
We also know there's not a lot of saving for retirement, and certainly not a lot of information consumed on how financial plans work, what financial planners do, and the importance of having a plan.
Lou: It's been fairly well documented that, younger generations, they don't tend to save or haven't begun to save for their retirement.
Now, there's numerous reasons for this, but we don't need to pound that nail. We'll really cover that topic in depth today. So I think younger people historically have been told to have a plan for retirement in almost "do this or else" approach.
Jon: Right.
Lou: So yeah, in reality, the do this or else approach, it hasn't worked for financial planning, or for a variety of industries, mentoring young people. Frankly, it hasn't worked in general in trying to convince young people to do just about anything.
Jon: Today, let's understand why and how we can change that mindset. As you said, we do see it almost every day, Lou, that yes, young people are not saving, young people are not fiscally responsible when it comes to retirement. It has been well covered.
Branden: I agree. Our industry has done a great job of explaining that young people are not putting money away. But as an industry, we haven't really explored in detail what those reasons are, and how to best position financial planning to influence the younger generation, to have a plan and to think about retirement.
Jon: We've been working on this podcast for a while and I have a hunch that's somewhere along the line we're gonna hear the words "behavioral investing" and the nine principles of behavioral investing. Let's get into why young people aren't saving and provide a path that's reasonable and easy to understand.
Let's start, Lou, by defining the younger generation. We'll it under 30.
Lou: Yeah, I think, you know, under 30 is a good place to start. It's a 12-year run from high school graduation to 30, right? So young people find themselves in a vast period of, let's call it, change and encounter multiple life events they've really never experienced before. So it may be. The toughest 10 to 12 years of their life.
Jon: I remember those 10 to 12 years. Learning a trade, getting a job, college, kids, buying a car, marriage, possibly buying a new home. The only consistency in that 12 or so year period of life is spending large amounts of money. You aren't preparing to spend large amounts of money. These expenses are not often foreseen regarding how large they are or when the timing of them might occur.
Branden: Yeah, that's exactly right. All the activities you just mentioned may involve large financial outlays. And at the very least, credit card debt that can start to gain steam quickly. Many of these situations often don't involve a lot of planning.
People fall in love and months later, they're certain they should get married. You know, the car that you've driven since high school suddenly needs a $10,000 repair and you need new vehicle. You may find yourself as a new parent and there isn't really a blueprint of costs for a child either.
Yeah, there's books out there to read, but eventually you find yourself at a restaurant, thinking maybe I don't get the steak tonight, and maybe a burger and fries will do.
Jon: I think we've all been there. The constant at that stage of life is change. Change, however, that comes with seemingly thousands of small financial decisions that no one puts into perspective regarding having a plan and how a plan can give you confidence in how a financial planner can coach you into making the right decisions.
Lou: You know, there are expenses at every stage of life, which is really what a financial plan is gonna help or helps you address by the combination of lack of experience. And the rapid rate of change can bury a young person really fast. So buying a home or renting an apartment is really not a simple tax.
You have, you know, first month's rent, last month's rent, you have deposits, and all items you need to live on your own, right? So a home involves expenses, like, again, furniture, mowers, snowblowers, while some of us that live in Michigan are snow areas. And the new roofs. And then if you add a child with all those added expenses, everything tends to add up pretty darn fast.
Branden: Yeah, that's spot on. One day you're stressed about waking up on time for a chemistry test, or you're looking for a new game to play online and the next day suddenly you're looking at a 2:00 AM feeding, or you find yourself being on call for clients, or you get a call from a family member who just had a pipe burst in their home.
You know, the list really goes on and on. It has been said many times, but life does come at you quickly. This 10 to 12 year period suddenly leaves, no one the time or energy to think about a financial plan.
Jon: It was Ferris Bueller that said, life comes at you very quickly. Meanwhile, the message of retirement, financial planning and saving are pervasive, and yet the message gets lost. Having or getting a plan should be top of mind for everyone going through such a change.
Branden: Yeah. When I talk with people under 30, I hear the word "time" more often than I thought I would've when I started in the business. You know, it starts with the phrase, I have a lot of time before I have to worry about retirement.
Or I don't have the time to really understand what my options are and one of my favorites and what I hear most often is, I'll get to it when I have time. You know, all variations of that theme.
Jon: Yeah. We all know that time waits for no one. To make people comfortable with all the options and choices, Lou, how much time do you think people need to think about retirement and what's the best use of someone's time at that age when starting to think about the process?
Lou: Of course that goes back to behavior and human nature. I think more to the point. It's our brain's inability to visualize many concepts into the future.
So let me explain. According to Jane McGonigal, 2it was an article in 2017, I think it was April of 2017. It was titled Our Puny Brain. Our Puny Human Brains are Terrible at Thinking About the Future. What she found was, this is FMRI, which is Functional Magnetic Resonance Imaging, studies suggest that when you imagine your future self, your brain does something somewhat weird.
It stops acting as if you're thinking about yourself. Instead, it starts acting as if you're thinking about a completely different person.
Jon: Wow.
Lou: So she continues with the study of the FMRI and how it works when thinking about yourself. There's a part of the brain called the medial prefrontal cortex and it lights up.
However, when thinking about other people or someone you don't know, it gets dark. What she had found is explaining that the further in the future you are imagining yourself, the less the actual FMRI activates. It actually stays dark.
Jon: That functional MRI is fascinating because it shows what parts of the brain are being used, what lights up and what doesn't. I knew we were gonna get some form of behavior principles in here today, Lou. So how does that relate to long-term planning?
Lou: Well, really, if you look at it, it makes it harder for us to take action for our future financial self. So it was also quoted by UCLA researcher Hal Ersner-Hershfield. He said, why would you save money for your future self?
When your brain, to your brain, it feels like you're just handing away your money to a complete stranger? So there are other implications to this beyond financial planning. Such as like reduced self-control or less ability to resist temptation. There's also increased procrastination, a lower motivation to exercise, and actually a tendency to give up sooner when frustrated in finding less likelihood to care about long-term challenges.
Branden: Yeah, and as much control people under 30 think they have over life, it's true. Many of the events we talked about come up without warning. As these events come up, thoughts of a financial plan don't accompany them. It seems to work in the opposite way it should. A plan can help you prepare and make those life events easier and can help you plan for a future and, eventually, retirement.
The financial planning industry doesn't explain the value and benefits of how a financial plan can, alleviate that stress and give someone peace of mind. Peace of mind is promised for those over 40 when it comes to retirement by the financial planning industry. But 18 to 30 is when peace of mind, in my opinion, would be very beneficial.
Jon: Yeah. It appears that as events that require financial resources occur, the less time people wanna spend on thinking about retirement for their future financial situation, especially when they're young. And now, given the studies that Loom just mentioned, it makes more behavioral sense.
Branden: Yeah, it really does. You know, the bigger the event, the more likely young people don't want to talk about financial planning or retirement.
Jon: It does make sense from a live in the moment and not worry about tomorrow mindset. I know there is more play here. We're starting to get into behavioral investing. A topic we've covered in past podcasts.
Lou: Yeah, exactly. It's back and this time it's for the younger generation or the younger form, we could say. We've covered in the past the nine behaviors to avoid again in these previous podcasts, and they always seem to come up regarding blocking the path to financial freedom.
You know what these do. So for example, making decisions without considering all the implications starts us on this path of what's called, we talk about narrow framing. It's easy to borrow a lot of money to start to cover these life events. In addition, optimism, which is believing good things happen to me and bad things happen to others.
That starts to come into play with all the borrowing, writing the credit at that young age. So after all, a young person might say, I can handle the debt, or, you know,,going broke, or not being able to make the payments. It just won't happen to me. Similar to, I can put off retirement. These are all phrases echoed, but the reality is that with a plan, those aren't just phrases, those become a lifestyle and without a plan, you could very well be headed for financial ruin.
Jon: Lou, I'm 42 and I think if I had to go back and tell my 20 something year old self, please don't spend on the credit cards. Please don't spend on the credit cards. Definitely would.
Lou: Right.
Jon: The whole idea of money at such a young age is one of confusion. We covered a little bit about the sources of information young people might be getting information from. But there's probably more to that piece of the puzzle. Where do you think the under 30 set is getting their information?
Branden: To be honest, there are traditional sources of information, such as a company's 401k provider. This is usually a presentation on why they should save, and there's often a small discussion regarding retirement. You know, it's really the smallest bite of information as it usually happens, maybe a couple times a year.
Which makes it often the easiest to ignore. There's the financial media, which is often no help for long-term strategic wealth planning, but it's often not sought out. The biggest influence today from what people have told me is social media. A lot of firms in the financial industry are going to social media with messages and, unfortunately, products that young people don't, one, understand, two, can't afford, and three, most often, they don't need. There's a huge disconnect in messaging.
Jon: Let's see. Advice to ignore the media, disconnected messages, products for the audience. Lou, sounds like we need to reference behavioral investing again.
Lou: Yeah, as you can see the keys to getting everyone to have a financial plan, no matter what the age or really the stage in life, often comes down to human nature and their behavior.
Jon: All of life's problems and solutions come down to financial planning?
Lou: Well, you know, I don't know about all of life's problem solutions, but successful, right, successful retirement planning. For anyone, it can start with the fundamentals of behavioral investing, which is simple. Tune out the media, stay focused on your plan, and of course, have a financial planner as a coach.
Branden: Yeah. And there are a lot of reasons young people don't pursue a financial plan or the financial coach in their lives, including, I don't have a lump sum of money right now, or again, I don't have the time. You know, I just had a child. I'm not earning enough right now. My car needs to be replaced. I wanna buy a house. The reality is all of those reasons are some of the biggest reasons to have a financial plan.
Jon: Yeah.
Branden: I think the challenge is to take those reasons and acknowledge that they're valid. But they're all part of a much bigger picture. There may always be a car payment, you know, house payment, possibly a kid to think about, et cetera. A financial plan is not an expenditure, but a way to get in front of, really, life. A financial planner is your coach who may provide a path and a way to success. When I speak to people and position it that way, I can see they really get it.
Jon: As an industry, guys, how do you think retirement is talked about, especially to young people?
Lou: You know, my view is it's more of a, "you don't have a plan, so you really don't have a chance when you retire. So get a plan and start saving."
Jon: Right.
Lou: We've done a great job of telling the world they're either too late or have a lot of ground to make up. There's a better way. So, back to what Branden said, about your biggest challenges really can be managed with a financial plan and a coach to assist. Also, when young people hear about financial plans in retirement, the industry throws out what we call the million-dollar promise. They do this a lot.
Jon: What is the million-dollar promise?
Lou: That if you don't start saving, you won't make it to $1 million. There's a perception that a million dollars is this magical number that everyone is seeking. And that'll keep them financially stable. And every year you don't save or plan, you're likely really gonna miss that number. And the number seems to have a hold on the younger generation.
Branden: Exactly. I see that number on paper a lot from different sources that are geared towards people in their twenties. I don't know how it became the magic number for people to strive for or get to. So much more goes into a plan and retirement has so many moving parts.
Lou: Yeah. A lot of promises get made with that number. It's been used for a long time to encourage people to have a plan and again, consider retirement or to scare 'em into a frenzy because they'll never see that number if they don't start saving and planning.
Jon: When you guys work with clients of any age, do you talk about the magic number?
Lou: We don't actually, we don't. Most people want a lifestyle in retirement, quite honestly, that'll cost them more than a million dollars. We focus on making sure their money will outlive them, and what we do is we customize the plan to what they tell us they wanna achieve for both themselves and their family.
Branden: Yeah, and I think as you kind of spin the message that way, I think it's a message that young people really need to hear. It's easier to understand. You don't want to outlive your money. It's a message that as an industry we should promote instead of the mythical $1 million or vacations of people in retirement going to Florida. For some reason, as an industry, we use a lot of visuals of people who are 50 to 80 years old.
It's rare or very rare to see someone in their teens or in their twenties in any kind of marketing. I think the visuals of people in their seventies and eighties enjoying retirement reinforce the idea that, for the younger generation, retirement is a long time away and there's no need for a financial plan when the reality is a financial plan is more than retirement.
Again, having a plan can help you throughout life. Unfortunately, although young people know many retired individuals, they can't, again, really see themselves at that age.
Jon: Fair enough. Let's talk about the idea of young people as a group or young entrepreneurs. We've heard of the phrase, birds of a feather flock together. So young people see their friends who are young and probably believe aging is inevitable, but now's not my time to worry about it. I'm pretty sure we have a behavioral investing term for it, Lou.
Lou: Yeah, of course. Of course. We're talking about herding. This is what we're talking about here. When the herd moves, it moves together and often acts as one. As the front of a herd runs off the cliff, well, you get the picture.
Branden: Yeah it's really an easy trap to fall into. I also see a lot of young business people who own companies and who are entrepreneurs who aren't thinking of the long term for themselves or for their employees.
Jon: Yeah. Entrepreneurship is incredibly difficult. I have to think that time and money are cited as reasons to not have a financial plan or retirement plan for their teams.
Lou: Yeah, we see this all the time. Entrepreneurs really, they pour themselves and, quite frankly, all their capital into their business without realizing they need to think more about the long term. There are ways to fund the business and provide for their team members.
Branden: Yeah. I'm actually seeing this now more and more as I continue to grow my network. Young business owners really don't believe there's a path to retirement as they scrape and invest, back into their companies.
Jon: As a small business owner, I can relate to that, as you said, that I start to think about what that might mean to a young person. The idea of taking care of themselves financially. I'd imagine with youth comes confidence and with confidence comes the world of do-it-yourself, financial planning and investing in stocks and hoping to strike it rich.
Branden: Yeah, I mean there's a large amount of confidence running through the younger generation. There's often a belief that some of the self-serve investing platforms can be used to carve out a path to retirement. They're in my opinion, to buy the hot stocks now in the hot industries now and watch the money roll in. Unfortunately that isn't how it works. This goes back to the concept of what we call speculating when you think you're investing.
Lou: Correct, correct. Really, on that, many people believe the financial media, or I call 'em a snake oil salesperson and start trying to pick or trade stocks, and the belief that they're gonna make big money. However, there's no plan. There's no long-term goals, there's no strategy, and most often no positive results.
It's unfortunate to see this so many times with young people. Although, I would say this concept goes to pretty much all ages. Investing in stocks is not fantasy football.
Jon: Right.
Lou: And mistakes are very high when it comes to your hard-earned money.
Jon: It's a great analogy, and this has been a great discussion as we start to wrap up, gentlemen. As a recap, we all agree people aged 18 to 30 are facing years of great change and financial expenses. What I thought was interesting today was basically this group could probably benefit the most from a financial plan because 18 to 30 are probably the years where people face the most obstacles and chaos from a life standpoint.
Branden: Yeah, absolutely. A financial plan can be started at any age in the younger generation, most likely will face the most hurdles. A plan would provide the most stability for them.
Lou: Yeah. I think just facing those hurdles with a financial plan and a financial planner, as a coach, as a reminder, find a planner that is either a CFP, which is a certified financial planner, or they're primary focused on planning. This will most likely ease, in my opinion, the financial burden. And it's gonna help assist in having a retirement where your money outlives you.
Jon: And on a final note, once again, behavioral investing has come into play as a valuable way to understand human behavior, so you don't behave yourself out of the returns you deserve. Is that right, Lou? Did I get it right?
Lou: Absolutely. Absolutely. It always comes down to behavior, the behavior of the investor themselves. Having, a financial plan and a financial planner. As a coach, we always, always circle back to the fundamentals.
Jon: Well, there you go, and thanks for joining our podcast today, Branden.
Branden: Yeah, thank you so much for having me.
Jon: And of course, thanks again, Lou.
Lou: Yeah, it was a great discussion.
Jon: Our next podcast, we're gonna reveal real life financial planning horror stories. How's that for a tease?
Lou: Yeah, we'll go into depth on behavioral investing and talk about the actual behaviors that lose money.
Jon: Sounds like a timely discussion with what's happening in the world.
Lou: I think it will be.
Jon: All right, until next time. Have a great day. The information provided is for educational informational purposes only and does not constitute investment advice, and it should not be relied on. As such, it should not be considered a solicitation to buy or an offer to sell a security.
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