Millennials can chill about not having massive savings

… because they’re young. Young people generally don’t have savings, and it beats me where the idea came from that they should have. H/T to Monevator, who introduced me to the idea that people in FT land are feeling troubled that only one in six millennials have £100,000 in savings. My personal reaction to that was WTF, what do these guys know that I didn’t?

I was in my late 40s before I ever saw an account with six figures to my name. Apparently you need a deposit of £100k to buy a house in London. Housing has always been expensive in London. I was born in London, went to university there, and spend the first decade of my working life there. I had job-switched a few times and the Bank of England inflation calculator tells me I was earning reasonably well for a twenty-something. I was single and child-free.

What was the best housing situation I could afford back then? A single rented room in a HMO in Ealing where I had to put salt round the periphery to prevent black slugs invading the place. This was an upgrade on the various rooms in shared houses I’d lived in before. I was in my late 20s, and no, I didn’t really have any savings either, other than about £5k, because I had believed that I needed to pay the fees of my MSc course myself, but it turned out that the Manpower Services Commission gave me a grant. It still didn’t help me buy a house in London.

So I moved out of London. The problem of not having a deposit was still there, but when I moved to Ipswich I was earning better and the prospects for salary increases were better for me. So I borrowed about £10k from a MBNA credit card on interest-free credit for a year to put down as a deposit for a house, perpetrating the single greatest piece of financial folly in my entire life – buying a house at a market high. I used my better salary to pay down that interest-free card over the year – I really did pay 0% on it. But I didn’t have savings of £15k from the start. Those were more innocent times, when mortgage companies looked at only your salary and didn’t ask about CC debts, because such debt was not as commonplace as now.

That £15k deposit was the equivalent of £40k now. Earlier generations of Ermine weren’t any better at saving than Millennials. There is an argument that young people start off more skint now than they used to. There is a compensation for those working in cities that they observe much faster career progression in their early 30s than previous generations

so it’s difficult to tease this appart – I would say that average and middling talented young folk had an easier time in my generation that Millennials, but high-flyers have much better opportunities now, part of a general winner-takes-all trend.

The Hemingway law of motion – Slowly at first, then all of a sudden

In Hemingway’s The Sun Also Rises, there is this passage summarising  economic change

“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”

and the principle applies to a lot of economic discourse. I found it also applies to savings, and the reasons are similar, though in reverse.

Young adults spend most of their money on living, and even in the 30s to 40s an awful lot goes into the mortgage if they have one – that was my single worst cost over that period in my life. Although all that money is going into consumerism, it is a durable consumer good, housing. You don’t see the numbers ticking up on a screen, at best you see them ticking down on a mortgage statement. Even that is not a linear progression, however, until it gets to the all of a sudden point at the end of the term

Slowly at first, and then all of a sudden. Remember the balance is my debt and their asset, it is better for me at £1k than at £16k…
Your twenties and thirties are really, really tough, financially

Because you don’t have any capital behind you, and you are trying to bootstrap yourself out of that. It’s particularly tough if your chosen lifestyle has children in it, because biology dictates that really wants to have started by your forties.

Millennials aren’t old enough to be in their forties yet. Then as they get into their forties, there is the faint sound of a distant signal, one I entirely missed.

Such passes the glory of the world, Time eats it like wormwood

The blazing fires of ambition begins to fade, things in life other than work become more important. Mark Zuckerberg put it a different way

“Young people are just smarter,” he said with a straight face. “Why are most chess masters under 30?” he asked. “I don’t know,” he answered. “Young people just have simpler lives. We may not own a car. We may not have family.” In the absence of those distractions, he says, you can focus on big ideologies. He added, “I only own a mattress.” Later: “Simplicity in life allows you to focus on what’s important.”

But there is another aspect to it, which is that as time goes by you may not take your sense of self worth quite so much from your reflected glory in other people’s eyes, as measured in your pay packet. But to have the privilege of making that call, you need to get out of the rat-race. Carl Jung put it well in a different context

we cannot live the afternoon of life according to the programme of life’s morning—for what was great in the morning will be little at evening, and what in the morning was true will at evening have become a lie.

Carl Jung Modern Man in Search of a Soul

There is a narrow switch-point, across one’s forties, where you can take the waning energies of the outward projection of career, and play this weakening hand into a financial system that hugely favours the better-off. In particular, higher-rate tax payers are massively favoured for saving into a pension, and you’re more likely to be in the 40% tax area if you have seen career progression.

In that sort of world, paying down your mortgage at a time of low interest rates is a serious error if you can pay the same amount into a SIPP and avoid paying 40% tax on it. For the better off millennials that is coming in the next decade – if they can forgo £60k of spending they will see £100k in their SIPP account.

I never saw a sum of £100k in any account to my name until my late 40s, and that was an ISA not a SIPP, although the SIPP did get a long way there. I’m not yet sure that yer average Millennial saving into a SIPP and expecting to retire at 67 would necessarily have got to £100k in that SIPP in their mid-30s, although those aiming for early retirement should have by now.

Like RIT, my present savings are from the Saving Hard angle, although by now investment returns are beginning to catch my younger self up, compound interest didn’t really help me get there, but it is giving my retired self a lift now.

I haven’t got a long and illustrious saving history behind me other than in being fortunate enough to have many years in a company pension. Most of my earlier saving history was buying myself out of the mortgage, in the typical young person’s saving mode with no six-figure balances to show for it.

The young Ermine was one of those average savers without any savings balances

…Until he wasn’t, as he saw the writing on the wall, but then he wan’t young any more 😉 My younger self’s greatest win was not spending more than I earned1. Young people’s saving tends to mostly take the form of paying a mortgage, reducing someone else’s asset rather than seeing their own account numbers go up. It is still a form of saving – they have given this massive claim on their future earning potential and they are chipping away at that claim.

There is a financial cycle of life. You will find it easier to work with it unless you inherit money, or are fortunate enough in both smarts and luck to make a lot of money early in life and keep it. In that cycle young people are rich in human capital and poor in financial capital. That’s why the young don’t have six-figure savings but the greybeards do. If young people do have savings in frightfully expensive London, then as the FT said in their article, those young people have either received an explicit bung from someone, or they are benefiting from an implicit bung if they are staying with their parents because that is saving them a lot of money that would otherwise be going to rent and living costs.

Millennials can chill about being young and not having savings, and the young in previous generations didn’t have loads of savings either. One in five of those feckless bastards only paid the interest on their mortgages and now act all surprised that there is such a thing as paying off the capital too, which indicates there’s plenty of financial muppetry in the older generation…

  1. with the exception of buying a house, which though stupid in timing, was largely a consumer durable. You know the pack drill, pay for cars, holidays and partying with saved cash or do without.