Why You Will Never Afford…
Every day I see a new headline like:
Why Millennials Will Never Retire
Millennials: The First Generation Not to Retire
Will Gen Z Ever Be Able to Afford a House?
Millennials and Gen Zers Want to Buy Homes, but They Can’t
Starbucks and Avocado Toast Are Why You Can’t Retire
These headlines are scary and you should take the time to read these articles to better understand what’s going on in the economy and how it could impact your future, even if the articles may be a little click-baity. Articles like these tend to serve as a reminder of what’s happening on a macro scale while citing some specific reason or examples as the primary or leading cause of the issue. Instead of writing another article on why the latest trend is to blame for the apparently unattainable dreams of housing and retirement, I’m going to quickly break down the financial fundamentals behind these articles. In short, housing and retirement are unaffordable to many because:
The amount of available discretionary income (income available after necessities are taken care of) is not sufficient when compared to the costs required to purchase a home or have a healthy retirement fund.
Discretionary income is what someone can save, spend, or invest after covering their necessities. In other words, the difference between what someone makes and their essential living expenses. Articles that focus on how Millennials are spending their money on avocado toast are implying that the person has discretionary income to spend, and they are just spending it the wrong way when they should be saving and investing. While this may be the case for some people, a larger amount of young people don’t spend enough on such things to the point where it would make a meaningful difference in their ability to purchase a home or retire. So let’s turn our attention to a core problem: many young people do not have enough discretionary income. This problem can be broken down into two separate issues:
Not making enough money
Having high living expenses (food, housing, transportation)
The interesting thing about not making enough money is that the definition of “enough” usually depends on the expected expenses of the person. There’s a reason that two people doing the same job will get paid differently if one works in Raleigh, NC and the other works in San Francisco, CA. Even with adjustments for cost-of-living, there are certain positions that simply do not make enough money to survive beyond rent and cheap groceries (Teachers in many states). For some, the solution is to make a career change to something that earns more money to pay the bills. For others, the best way to get by is to marry a life partner that works in a higher-paying industry. Eventually, society will face a problem when no one can afford to work at a low-paying job because they won’t be able to survive on poverty wages compared to the rising cost of living.
Speaking of the cost of living, it’s been going up for quite a while. In just the last year alone, the annual inflation rate hit 8.6%, which is the highest in 40 years. The increase in inflation is coupled with a housing shortage that is driving up the price of housing in many areas across the country. Some areas saw an increase in the price of homes of 14% during the pandemic, and rental prices have spiked in many areas for new leases. In addition to general inflation and housing, gas prices have spiked as well, increasing 233.5% since January 2020. What this means for many is that it simply costs more to exist in modern society than it did last year. While this is usually the case due to general inflation of 1-3% each year, it is especially difficult now due to the higher levels of inflation and shortages coming all at the same time.
When we combine the relatively low wages and the increases in the cost of living through inflation, it’s apparent that many people will have less discretionary income to support the dream of home ownership or retirement. This, combined with the fact that the cost of living and housing keeps increasing, means that without some change to support a higher level of discretionary income, the milestones of retirement (other than social security programs) and home ownership are mathematically unattainable*.
*Remember, no amount of budgeting can overcome costs of living that increase more than pay raises.
What Can I Do?
If you are a young person who is reading this and other articles and are worried, the first thing you should do is understand your financial situation and how it impacts your future. Once you have a good understanding, you can take steps to increase the amount of discretionary income that gets put towards the goals of retirement or homeownership. Start by reviewing these questions:
Are you spending too much of your discretionary income on wants (like avocado toast)? If so, do what you can to cut back on spending and increase the amount you save and invest.
Are you making enough money at your job to support a healthy personal financial situation? If not, consider dusting off that resume and finding a higher paying job if you are able to.
Are necessities in your life costing too much? If so, consider what alternatives you may have like living with family or roommates to reduce these costs.
Remember, personal finance is personal! While many young people are facing the same macroeconomic challenges, the way that you can deal with them is unique to your own situation. The first step towards progress is understanding how things work, and I hope this blog has taught you enough to get you started!