Millennials are overconfident and underprepared for managing their money, according to new research from the Denver-based National Endowment for Financial Education.
Only 24% of the millennial respondents (23-to-35-year-olds) showed basic financial literacy in the study while only 8% demonstrated a high level of knowledge. That may not be all surprising considering that only 22% of millennials have received some form of financial education, the NEFE study found.
Nevertheless, 69% of millennials gave themselves a high self-assessment of financial knowledge.
“Millennials are known for having unrelenting belief in their own abilities,” Ted Beck, president/ CEO of NEFE, said. “This generation is diverse and highly educated. However, their overconfidence puts them in an extremely fragile financial position, and sadly, they don’t realize it.”
Many millennials are in a fragile financial position because they are heavily indebted, borrow against their assets, pay the minimum amount on credit cards, have no emergency funds, and some even use payday lenders, including millennials who have bank accounts, according to the NEFE study.
On the positive side, the study found 88% of millennials are banked, 51% have a retirement account, more than 40% own their homes and one-fourth have investments in stocks, bonds or mutual funds.
But the majority of millennials (53%) feel they have too much debt. Two-thirds have at least one source of long-term debt (student loan, home mortgage, car loan), and 30% hold more than one source of long-term debt.
Thirty-nine percent of millennials are paying off student debt, while 29% have a mortgage and 36% hold car loans. More than one-third have unpaid medical bills and 30% of millennials with bank accounts had overdrawn their accounts over the prior 12 months. Moreover, 45% of millennials pay only the minimum monthly on the credit card bills, and 52% engage in some form of expensive credit card behavior that can trigger high interest payments and unnecessary fees, the NEFE research found.
Nearly 70% of millennials hold at least one credit card.
About 20% of those with a self-directed retirement account either took a loan or made a hardship withdrawal in the prior 12 months.
“Young adults may not understand the consequences of their actions, such as how taking money out of their retirement accounts now has an exponentially negative effect on account balances in the future,” Beck said.
While millennials are many years away from retirement, it’s the next 30 days that they would be unprepared for should a financial emergency occur.
For example, the NEFE study found that nearly half (48%) of millennials could not come up with $2,000 within 30 days to pay for a financial emergency. However, 49% said they were either certain or could probably come up with the $2,000 within 30 days.
The study also revealed that 42% of millennials have used payday lenders, pawnshops, auto title loans, tax refund advances and rent to own products over the last five years, and 19% have used these alternative financial services on a recurrent basis. Even among millennials with bank accounts, 39% have used alternative financial services.
To help millennials improve their money management challenges, the NEFE recommended that organizations should make financial education available where the millennials are such as their workplaces, college campuses, trade and vocational institutions, communities and online via search and social media channels.
