With Kerri Anne Renzulli, Reporter at Time Money
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Millennials comprise a generation with a mind of its own, uniquely different from their predecessor baby boomers. They’ve grown up with technology in a more connected world, believe that our Earth is a shared resource, cherish personal freedoms, and expect more from the workplace. Millennials also tend to switch jobs more often—once every two years on average—than generations before them and tend to place less value on the importance of money. Kerri Anne, a millennial herself, talks about millennial attitudes towards money, spending, and savings and offers insights on what millennials are doing right or wrong, and how they can better manage their finances for a comfortable retirement.
Millennials Live By Plastic
Turns out, millennials live by plastic and favor debit cards 2:1 relative to credit cards, notes Kerri, who is a millennial herself. The issue, though, is that people tend to spend more on plastic than if they had to pull out hard cash each time they made a purchase. Kerri calls this the “credit card premium”.
A 2008 study found that physically handing over dollar bills triggers a sort of emotional pain that helps deter spending; with plastic, we do not develop the same sort of physical attachment as we do with cold cash. As Kerri puts it, when you pay for plastic, you focus more on the benefits of what you’re purchasing rather than the price, and when you pay in cash, you focus on price first.
As a result, millennials are more debt-prone than the generations before them. About 11% of all millennials overdraft more than 10 times a year, which is quite high, and only about 40% pay off their credit cards in full each month.
24-Hour Cooling Off Period
Steve notes that overdraft fees alone can add up to about $350 every year, and credit card interest at 16% to 20% could work out to even more. To combat this, Kerri suggests giving yourself a 24-hour cooling off period to sleep on non-essential purchases. For instance, if you really want a piece of clothing or a gadget, give yourself some time to make sure you will use it and to consider if it’s worth its price.
Steve wonders if there are any tools to help millennials avoid retail temptation. Kerri says people of all ages with smartphones can use apps such as mint to track budgeting and spending and other apps to rein in expenses. The mint app, for instance, lets you enter your card information and set preferred spending limits, tracks expenditures, and also alerts you when your spending approaches the limits you set, with the overall effect of forcing you to see how much you’re actually spending.
Setting Your Budget
While Kerri has no panacea on controlling your willpower, she does have a recipe for setting your budget, which entails two things: looking at your after-tax income (without bonuses or tax refunds) and tracking your expenses to see where you’re spending all that money. This simple exercise alone is pretty effective at getting people to dial-back their discretionary spending.
She recommends not being overly strict with your belt-tightening and suggests experimenting with cutbacks till you find something that works for you. Steve suggests putting aside 10% for savings and controlling your budget on the remaining 90% so you’re not living month to month.
While budgets are easy to make in theory, Kerri shows you how to make realistic budgets and stick with them over the long term, with online tools and apps that make financial budgeting much more manageable so you save for the things you enjoy, lead a happier life, and have enough for retirement.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: What spending mistakes are millennials making and what can they learn to get it right? I’ve asked Kerri Anne Renzulli from Money to answer that question for us, at least help us look at that question. She covers family finance, estate planning, and whatever else they assign her on a particular day, and Kerri Anne used to work for the Palm Beach Post and the Orlando Sentinel. So she’s a Florida girl who’s been transplanted to Manhattan, and she says she’s still trying to figure out the concept of seasons and why people in the north like them so much. So welcome to the show, Kerri Anne.
Kerri Anne Renzulli: Thank you, Steve.
Steve Pomeranz: So, you know I’m an advisor by trade, and I’m going to give you some advice about why people like seasons. Fall and spring can be magical; have you experienced that yet?
Kerri Anne Renzulli: A little bit.
Steve Pomeranz: Okay.
Kerri Anne Renzulli: I’m not particularity sold yet.
Steve Pomeranz: Okay. Summers in New York can be brutal, but there’s plenty of ways to get away, and finally winters are good if you ski, and maybe you’re an otter or something. I haven’t quite figured out winters myself, but that’s my little pearls of wisdom on living up north during the seasons, which I haven’t done, I’d say, for the last 30-plus years. Anyway, let’s get to the topic we’re talking about today, and that’s the spending mistake that millennials are making. Millennials don’t shop like their parents. What’s different about them?
Kerri Anne Renzulli: Millennials increasingly like to swipe plastic. I’m a millennial myself, and I can tell you that I hardly ever have any cash in my wallet, much like my generation. We love our plastic and our debit cards, in particular, by a ratio of about three to one.
Steve Pomeranz: Do you guys use checkbooks at all? Do you know what a checkbook is, Kerri Anne?
Kerri Anne Renzulli: I use that to pay my rent here in New York but other than that, it just kind of collects dust.
Steve Pomeranz: Okay, alright. That’s a big change from my generation, I can tell you. So millennials are using plastic, and they prefer the debit card variety as opposed to the credit card variety. What about plastic can get a millennial in trouble?
Kerri Anne Renzulli: Easier on plastic. There’s been quite a bit of research into what’s called the “credit card premium”, which is where we tend to overspend when … well, not overspend, but we tend to spend more when we’re using plastic than if we made that same purchase with cash. It’s a little easier to part with our money when we’re just swiping a piece of plastic than when we’re actually counting out the bills and getting change back. There was a 2008 study published in the Journal of Experimental Psychology that found that physically handing over the bills triggers a sort of emotional pain that actually helps to deter spending. When we just swipe a piece of plastic, we don’t get that same sort of physical attachment.
Steve Pomeranz: I like the way you put it in your article, that when you pay for plastic, you focus more on the benefits of what you’re purchasing rather than price, and when you pay in cash, you focus on price first.
Kerri Anne Renzulli: Yes, that was from another study that was digging a little deeper into why it is so much easier for us. Yeah, when we’re just swiping it, because we’re not thinking of the aversion to money, we’re focusing mainly on the benefit of what that purchase is going to bring us.
Steve Pomeranz: That is a danger, I can tell you. So is there a tendency to rack up overdraft fees in the case of using a debit card or rack up debt in the case of using a credit card?
Kerri Anne Renzulli: Unfortunately, millennials are a little more debt-prone. We keep our debt levels a little bit lower than other generations, but we do tend to rack it up. Millennials overdraft. About 11% of millennials overdraft more than 10 times a year, which is quite high, and only about 40% of millennials pay off their credit cards in full each month. I think that’s due in part to a little bit of the financial instability our generation’s experiencing. But definitely not good because you get hit with those costly overdraft fees. They’re about $34 each time, and then, obviously, when you rack up with credit cards, you get that revolving debt and those interest rates.
Steve Pomeranz: Yeah, so if you’re doing that about 10 times a year, that’s $350 of overdraft fees that’s just really going out the window or going into the bank’s pocket, and then, of course, if you’re paying 20% interest or 16% interest on your balance on your credit card, you know even if you did bargain for the price, by the time you pay it off, you’re probably paying way more than what you spent originally for it. One of the bits of advice that you gave that I like was give yourself a 24-hour cooling off period to think over any non-essential purchases.
Kerri Anne Renzulli: I think that’s really important. It’s one of those things where odds are it’s going to be there the next day. If you really, really have to have that piece of clothing or that gadget, give yourself some time and make sure that it wasn’t just something in the moment or because you have an off day or whatever. You just, you know, felt like being a little bit spendier. Make sure that you actually want it and will use it and it will be worth it to you, the cost that you’re going to pay.
Steve Pomeranz: That’s also good advice when making important decisions in your life, especially if you find something that really gets you excited and your adrenaline starts pumping and all of that, but this is an important decision in your life. You know it’s good to back away if someone’s trying to sell you the Brooklyn Bridge or something at a great price, time to back away, take 24 hours to think about it, maybe take a weekend to think about it, and so you can see it more clearly and whether this is really something you need in your life or whether you can do without it. How does a millennial avoid all of this? What are some of the tools that they can use?
Kerri Anne Renzulli: It’s hard to avoid temptation, I’ll tell you that much. One of my favorite apps that I find really helpful for tracking spending is mint.com app or the Level Money app is also very good.
Steve Pomeranz: Level Money app, what did you say it was?
Kerri Anne Renzulli: Level Money.
Steve Pomeranz: How do you spell that?
Kerri Anne Renzulli: L-E-V-E-L and then money.
Steve Pomeranz: Okay, Level Money. Okay, and mint.com. Okay, go ahead.
Kerri Anne Renzulli: Yes, mint.com is sort of the traditional forerunner in this area. But basically, what you do is you just put in your card information into the app and it will track all your expenses, and you can go through the app and set how much you want to spend. So let’s say you only want to spend $300 on groceries that month, it will track your expenditures. You get an alert when you’re getting close to your limit, or you can even set more generic limits like, “I only want to spend $800 on my credit card this month.” And it will let you know when you’re getting close. So if you’re not good at tracking all those purchases that you make, this is a more forceful way. It will send you an alert and force you to really reconcile how much you’re actually spending.
Steve Pomeranz: Yeah, so it will give you a warning to say, “You’re approaching your $800 limit.” But then the rest is up to you to go you know, “Well, you know, so I got to $900 or yes, I’m actually going to stay at $800 or what would it be like if I actually was at $700 this month?” You know but it doesn’t give you the willpower that you may need, but at least it’ll tell you, it’ll keep you a little bit more organized. So how do people set a budget that they can stick to, Kerri Anne?
Kerri Anne Renzulli: Unfortunately, the willpower thing I don’t have a tip for, but setting the budget, you just basically have to do two things. You just have to look at what you’re bringing in, so your after-tax income, figure out exactly how much money you’re bringing in, don’t factor in bonuses or tax refunds. So things that are variable that you might not be sure of.
Steve Pomeranz: Real money in the pocket, not what may be coming.
Kerri Anne Renzulli: Exactly. Don’t count on things that might not actually be there. Then you want to track your expenses, see where exactly you’re spending all that money. You can do this for a month to two months to really get a sense of what am I buying, then sort of evaluate what you’ve actually spent your money on. Is this where you want to be spending it? Are you saving as much as you want? Then normally there are a few areas with all people where you’re perhaps spending too much. Perhaps it’s eating out or perhaps you’re overspending on gadgets or music or clothing. So some discretionary area where you spend too much but you can dial back, and what you want to do is just pick a few problem areas to focus on, and set realistic goals. Obviously, this is like the crash diet. You can’t just cut it out and say, “I’m never going to spend more than $100.”
Steve Pomeranz: Yes, so let’s talk about that because you don’t want your budget to be like a crash diet because that’s going to be impossible for you to keep to, as all these kinds of diets fail. Tightening your money belt will also fail. So you have to be very reasonable about it, and I like this idea that you want your goal to really target about 90% of your take-home income because we know where that other 10% should go. Where should it go, Kerri Anne?
Kerri Anne Renzulli: Put it in your savings.
Steve Pomeranz: That’s right.
Kerri Anne Renzulli: Preferably probably retirement, but whatever the savings objective-
Steve Pomeranz: That’s right.
Kerri Anne Renzulli: … You want to achieve.
Steve Pomeranz: So get to 90% of your spending and your income goal, and I think you’ll be a lot happier. There’s an old saying that if you have $1 and you spend $1, one, you’re miserable. If you have $1 and you spend $0.99, it’s bliss. So it’s the same concept, whether you were in the 18th century hearing that advice, or you heard it from Ben Franklin or you hear it from me, it’s very important not to live month to month, and to have control over your spending and control over your finances, because you will actually be happier if you do so. Any final thoughts for us, Kerri Anne?
Kerri Anne Renzulli: I think it’s just with budget, chances are you’re going to fail one month, you’re going to mess up, you’re going to overspend, and that’s fine. Go back, revise, and tailor. It’s probably going to take you a few times to get one that you’re going to stick with, and that is okay. I feel like people set a budget and they fail and just sort of give up, and I still say, “Yeah, you’re going to fail. Maybe two or three times you’re going to have to revise it, but you’ll get one that you’ll stick to.”
Steve Pomeranz: Yeah. You know there used to be a plaque in an office of one of very rich industrialists, we won’t mention any names, but there was a plaque that said, “Budgets are for sissies.” But I can tell you right now that he wouldn’t have done anything without knowing what he was going to be paying for it, and what the potential returns were that he was going to get, and he was watching every dollar come out the door. It’s the same thing, whether you’re talking about your investments, or you’re talking about your own personal life. My guest is Kerri Anne Renzulli. She is with Money Magazine, and she’s here. She’s a millennial and she’s following millennials for us today. Thanks so much for joining us, Kerri Anne.
Kerri Anne Renzulli: Thank you.