The Rules Aren’t the Same – Some Reasons Why Young People Aren’t In the Same Position as Their Parents When it Comes to Personal Finance

For a very good portion of your life you'll be taking advice and feedback from your parents and people who are significantly older than you. These people have significantly more life experience and can offer you critical advice to get you through some of the toughest times that you haven't seen yet, so it's very important to listen and hear what they have to say. That being said, you need to understand that when it comes to jobs, personal finance, home buying, and the personal life choices that integrate with those things, the Millennials and Generation Z of today are playing a fundamentally different game than the Baby Boomers. 

To highlight the differences between the generations we're going to take our classic quantitative and qualitative approach. First, we'll examine a couple numbers that contribute to the increased costs that the younger generation faces in the modern marketplace. After that, we'll take a step back and see how the world has changed in ways that aren't as easy to show with numbers. 

The Quantitative

The first thing that many people like to talk about when it comes to income disparity across the generations is minimum wage. Based on this CNN article we found, the minimum wage in 1989 was a whopping $3.35. While that sounds pitiful in today's economy, we need to consider the effects of inflation and how much that amount would be worth today. According to this inflation calculator from smartasset.com, inflation between 1989 and 2020 is about 112%. In today's dollars that minimum wage would be worth about $7.10. as of writing this blog the federal minimum wage is $7.25, and if you live in certain parts of the country that enforce higher minimum wages at the state or county level, you could be getting even more. Most people reading this won't be working a minimum-wage job, but it's important to understand that the minimum wage can be used as a gauge to understand the purchasing power of those working those lower-paying jobs. The important thing to note of this section is that the minimum wage has remained stagnant in terms of purchasing power across the Nation, with increases in certain areas where local laws force it to be higher. The reason why there's local laws for say higher minimum wage is because the other costs of living have also risen to the point where someone making the federal minimum wage could not survive in those higher cost of living areas.

But let's say you want to make more than minimum wage. For many people that means going to college and getting an education that will hopefully set you up to have a higher-paying job. This is not the only option (trades such as plumbers and electricians do relatively well with a much smaller initial investment), but it is the path that most people are looking to take so we'll focus on that. Based on information from educationdata.com, we can see that this is where some of the changes come in. The average cost of college has gone from about $25,000 to almost $50,000 after adjusting for inflation. For many young people this means taking out loans can be a requirement to getting that education and having a higher-paying job. While this might not be applicable to everybody, I know people who are still paying off their student loans for multiple years after they went to school. By having to pay for these loans, people can have significantly less disposable income even after they are in that higher-paying job. When you compare the older and younger generations, the lower cost of education (and its relative value, which we will talk about below), is a huge advantage in terms of lifestyle and relative take-home income.

The last of the quantitative factors we're going to point out is the average cost of homes in the country. According to this article from Investopedia, the average cost of a home in the United States in 1989 was about $150,000, compared to today's price of $385,000. when adjusting for inflation using that 112% from above, we can see that the cost of housing has outpaced inflation by a margin of about 30%. 

But looking at the quantitative factors alone, the increases in minimum wage college in real estate don't necessarily seem that bad. The real differences arise from the qualitative factors.

The Qualitative

First and foremost, it is important to understand that where you live can significantly influence cost beyond the averages listed above. A person living in the middle of Iowa could get a very nice house and a piece of land for that average price of $350,000. That same $350,000 could amount to a small condo in a large metro area with a large monthly condo fee. Before reading anything else, it is important to understand that personal finances personal in your situation will be different depending on where you live. 

The first big qualitative factor is the value of a college education. For the older generations, a college education basically guaranteed a job and one that likely paid well enough to get by. That is simply not the case anymore for some professions. There are plenty of people who major in psychology or certain social sciences that have trouble finding a job out of school despite paying all the money to go there. When you combine the fact that the undergraduate education is more expensive and the benefit you get from learning that education is less than it was 30 years ago, you can see why the younger people are set up to have fewer opportunities coming out of college. And it's important to know that I'm not saying that college is not worth it. I'm writing this blog as a Certified Public Accountant, a job that requires an undergraduate degree with very specific courses and the equivalent of 5 years of education (which can also be satisfied with a master's degree and an additional cost). In addition to accountants there's lawyers and many professions in the STEM fields that certainly require formal education. 

What we are saying is that with so many people graduating with these degrees, the supply and demand considerations that were present 30 years ago are not the same as today. For today’s graduates that likely leads to relatively lower residual income because of the differences in pay, opportunities, and other costs. 

For those graduates who chose to go in certain career areas such as technology, the locations of their future jobs tend to be in higher cost of living areas. Examples of this include Silicon Valley for those working in technology, and New York City for those working in investment banking. There certainly other places you can go with these degrees, but the point we're trying to make is that the higher-paying jobs tend to be offset by the higher cost of living. In 2020 the best option is to secure a job working remotely so you can have an arbitrage from the high cost of living areas to where you're living, but that's not always available. 

The final thing I like to touch on is benefits and how the job market functions in the modern economy. Many young people today don't even know what a pension is and have a minuscule chance of ever seeing one in an employment agreement with their name on it. In the past, pensions were used as an incentive to stay with the company for an extended period. Those pensions provided a level of financial security that younger generations will likely not experience. While these systems have been replaced with a 401k and the company matching the contributions of the employees, more of the burden falls on the employees to fund their retirement. This becomes more important when you look at people who must move to higher cost of living areas for their jobs and end up having less disposable income to fund their own retirement. 

What does this mean for you?

The reason why we took the time today to explain all of these factors is so you have the context to understand that you are not the same as your parents. The strategies, opportunities, and resources that were available to them are not the same as the ones available to you. In some cases, you have vastly more opportunities through the power of the internet. What this means for you is that you cannot hold yourself to the same standards they had when they were your age and you should not limit yourself based on that perspective. Take the time to educate yourself on how the world works today compared to how it used to work and use that knowledge to contextualize your parents’ advice. By doing so, you'll be able to make a more informed decision on how you use their wisdom to your advantage.