Generation Z: 8 Steps To Achieve Financial Freedom

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Every generation has its uniqueness and Generation Z is no exception. Gen Z is the youngest generation, gaining ground as the oldest Gen Zs about 25 years old are in the workforce. They are growing to be the largest in size, and in spending power, (there is no wonder why they are an appealing generation to marketers), ethically diverse, and may become the wealthiest generation.

Most of all, Generation Z can achieve financial freedom. Financial freedom means having the ability to achieve your life goals because you’re managing your finances without stress. Gen Zers are in the early stages of earning money, saving, investing, and making impressive strides.

Like previous generations, however,  they are starting to accumulate debt but in some ways much quicker as they acclimate to their spending power. A Student Beans survey shows that 57% of Generation Z consumers want to save more, spend less, invest, and retire earlier.

Gen Z can improve their financial literacy, creating good financial habits now, ahead of their earnings growth potential. It is not unusual for individuals to begin adulthood with low financial literacy. We’ve all been there but the point is to rise up to higher levels of financial management.  However, gaining financial independence from your parents is the first step.  Generation Z  should work on their financial acumen to avoid the financial stresses experienced by previous generations.

According to Pew Research Center, Gen Zers were born between 1997 and 2012 and are between 10 and 25 years. Gen Z looks a lot like Millennials, but without the impact of the Great Recession which presented the latter with significant challenges.

On the other hand, Gen Z had the COVID pandemic to deal with, and it likely amplified their dominant traits. They are growing up in a digital world with technology, smartphones, high-speed Internet, and social media while learning and working remotely. These distinctions will shape their views and values. 

As we review some financial statistics about Generation Z, we will share our best practices in budgeting,  savings, building credit, managing debt, and investing to achieve financial goals and ultimately build wealth.

Both Generation Z and Millennials stand to inherit a whopping $84 trillion in the great wealth transfer over the next 25 years, but still, Gen Z needs offensive-defensive strategies for today. 

Generation Z Statistics

Generation Z, also called Zoomers, are digital natives from the beginning. They are tech-savvy, always connected, and learn differently.  Here are Generation Z  Statistics:

Have a disposable income of $360 billion.

Accounts for 27.68% of the US population (86 million),  more than the millennials at 22.18%.

18.7 million Generation Z workers 12.2% of the US.

Expected to be up to 30% of the US workforce by 2030.

Accounts for about one-third (32%)  of the total global population.

Nearly 99% either own a smartphone or have access to one.

Instagram is one of the most loved social media channels to learn about products.

Over 60% of Gen Z check YouTube at least once a day.

91% want to switch jobs.

46% of Gen Z respondents globally say they have done gig work.

They cite reasons for gig work as flexible work schedules (55%) and greater independence (53%).

33% believe flexibility at work is important and wouldn’t work somewhere where they didn’t have a say over their schedule.

 Generation Z: 8 Steps To Achieve Financial Freedom:

 

1. Parents Can Bridge the Financial Education Gap

For younger Gen Z kids, parents can play a significant role in introducing their kids to good financial habits. By bridging the gap in financial education lacking in most high schools and colleges, they can start at an earlier age through reading age-appropriate books or fun activities. Without parental guidance and formal financial education, Generation Z will be ill-prepared to fully manage their finances. Gen Zers spend much of their time on social media platforms which for this new generation’s views.

According to a Bank of America Better Money Habits survey, one-third (34%) of Gen Zers rate their financial literacy low, among whom 40% say they don’t know where to start. There should not be such a gap in financial education for young students. However, educational institutions rely on parents who shy away from talking about money with their kids.

There are many apps available for parents to help their kids save, reduce spending, and invest in mutual funds and ETFs. Parents should leverage their preference for working on digital platforms. Apps like Acorns and Greenlight can show younger Generation Z kids how to boost their savings through round-ups, spend wisely, and set goals so they can have more money to invest and make money. Although they won’t become millionaires overnight, investing apps emphasize financial education for younger kids to develop at an early age.

Gen Z learns differently than previous generations. Besides their parents, a GoBanking survey of high school or college Generation Z found that a primary source of financial education (38.8%) was YouTube and TikTok while 17% cited other social media sites including Twitter and Instagram. Even Fidelity Investments has a TikTok channel to capture Gen Z’s attention.

2. Set Financial Goals

By setting financial goals, you can lay the groundwork to achieve your priorities successfully which can be:

  • Creating a workable budget
  • Advancing your career
  • Adding to savings
  • Establish an emergency funds
  • Contributing to retirement accounts
  • Building credit
  • Paying off debt
  • Investing in the stock market

We’ll tackle many of these financial priorities in our post.

 

3. Create A Budget

Creating a budget is an excellent place to start understanding your finances so that you can better manage your financial needs and priorities. 46% of Gen Zers say they struggle to achieve their financial goals with their current income.

Generation Z is at the early stages of earning an income, and 62% are taking on side hustles for additional income to help pay for rent, groceries, and paying off debt. 68% of Gen Zers use some form of budgeting system.

There are many ways to create a budget that you can maintain so that you can track and control spending. By making saving money a financial priority, it may be easier to keep spending below your means.  Pick a budget that works for you for maximum benefits and is simple to use. As digital natives, you may find budgets apps that are appealing.

One of the best budget apps comes from Personal Capital which has free comprehensive financial tools as a wealth management business with human financial advisors.

The 50/30/20 budget divides your after-tax income into three buckets. We recommend a “pay yourself first” savings strategy which provides financial discipline. The first bucket allocates the first 20% going into saving and debt prepayment if you can swing it. The second and largest bucket of 50% goes to your basic living needs including housing and related costs, and the third bucket of 30% is for wants and discretionary spending like dining out, subscriptions, and entertainment.

Where should your savings go? Most of your savings should go into your retirement accounts but that isn’t always the case. A Gen Z Planet survey reported that 85% of the Gen Z save about one-third (32%) of their income with most of the money going into low savings accounts, while 26% invest in stocks and 14% in their retirement accounts.

By saving your money, you have a better chance to avoid overspending. For example, many young people order from food delivery services such as DoorDash. These services provide conveniences but at higher costs of up to 90% more.    

4. Make Savings A Priority

The high disposable income of $360 billion will give Gen Zers immense spending power that appeals to marketers and retailers but not necessarily to their wallets. Generation Z should put their finances in order by prioritizing consistent savings with a “pay yourself first” strategy. With this healthy mentality,  you can arrange automatic transfers from your paycheck directly to savings goals like an emergency fund and retirement accounts.

It is essential to establish and maintain an emergency fund for six months of unforeseen expenses. It is such a basic financial need for all of us, 50% of Americans can’t cover a $400 unexpected cost without challenges and overuse their credit cards for such bills.

When your savings are not enough to satisfy your goals, you may want to consider additional streams of income from side hustles to boost your resources. Having savings to turn into investing gives you the opportunity to build wealth.

5. Building Credit And Boosting Scores

According to a Bank of America survey, 27% of Gen Z respondents make building credit a financial priority. Building and maintaining good credit will help you realize more affordable loans for your financial goals like buying a car or home or starting a new business.

There is a long list of people who will be interested in your credit report and credit score:

  • Current and potential lenders to buy a car, a home, and get credit cards.
  • Potential landlords
  • Utility services
  • Insurance companies
  • Current and prospective employers
  • Future partners in business and life

It takes time to boost your credit score, especially when you are just starting out.

You should understand the five categories of your FICO credit score: payment history (35%), amounts owed/credit utilization rate (30%), length of credit history (15%), new credit (10%), and credit mix (10%).

While you may have had a chance to build your credit given your young age and short history with loans, you should avoid big errors in the most significant components by not missing a payment or having too high a credit utilization rate. Instead, pay your bills on time at a minimum to build an excellent payment history. Figure what your total available credit (usually posted on your credit card bill) from all your loans and use less than 30% of your available credit to get a desirable credit utilization rate.

The three remaining components, credit history, new credit, and credit mix, will take time to help you build your credit, so don’t rush it by adding new accounts to speed the process.

According to Experian, the average FICO credit score is 679 in 2021 for Generation Z below the average score of 714 in the US. You can boost your credit score in several ways.

If you are unable to get a credit card, become an authorized user of your parent’s card if they have at least a good credit score. Alternatively, you can apply for a secured credit card which can affect your credit. It works like a standard credit card but you are required to make a cash security deposit usually $200 to $300 which establishes your credit limit.  Prepaid debit cards can be more convenient than cash but there is no credit assessed with a debit transaction.

 

6. Managing Debt

It may be challenging to be debt-free, especially when you may be carrying substantial student loans. However, managing your debt to reasonable levels is essential.  Generation Zers are in the early stages of accumulating debt from various sources including student loans, car loans, and credit cards.

Debt creeps up so quickly for young adults when you first get access to loans. The danger of not managing your debt properly is that your debt can grow faster than your savings and play havoc with your financial goals and priorities. The best thing you can do is avoid debt spiraling out of a control.

It comes back to saving money for your goals so that you can accumulate a desirable down payment to buy a car or a home as an excellent strategy. You may even want to postpone your car purchase or consider a more affordable car. As interest rates are set to rise from historically low levels, loans will become more expensive. Mortgage rates are rising and are at 5%+ levels,  and prospective buyers may begin to postpone purchases.

What can you do to keep your debt to manageable levels?

Spend less than you earn. This may sound like a cliche but if you can’t afford to pay off your credit cards in full each month, then reduce your spending. Dine out less, and eat at home more with friends and family.

Pay your bills on time so that you don’t incur late charges. This habit will help you build a better credit score.

Pay your credit cards fully each month, or as much of the balance as possible. When it comes to the most dangerous debt of credit cards, just paying the required minimum will ensure that your card balances will mushroom to a size difficult to handle without some kind of debt reduction plan.

When tackling a large card balance, the issuers charge high-interest rates that will likely go higher due to the Fed’s policy. Use the snowball debt method to pay off your highest debt cost first. Remember that you must continue to pay the minimum amounts on your student debt, mortgage, car, and other loans.

According to Experian’s consumer debt study, Generation Z’s average total debt of $16,043, reflects the highest debt growth of any generation between 2019 and 2020, growing 67.2%. Experian said the increase “seemed to track with age-the greatest growth occurred among the youngest consumer group.”

Average debt categories by category were:

  • Credit card debt of $1,963
  • Student loan debt of $ 17,338
  • Auto loan debt of $15,574
  • Personal loans of $6,004
  • Mortgage loans of $169,470

The average debt for Gen-Zers is below the older millennials at $87,448 because some Gen-Zers are still living at home.

 7. Saving For Retirement Early

According to a recent survey by Goldman Sachs Asset Management, 25% of Generation Z plan to retire before age 55. It is unclear whether this younger generation is overly optimistic about receiving a significant transfer of wealth from their parents.

Still, Gen Zers have been saving for retirement earlier than in previous generations. In the 21st Transamerica Retirement Survey released in 2021, 70% of Generation Z surveyed have already begun saving for retirement in their 401K plan or outside of the workplace. The median age at which Gen Zers began to save is 19 years compared to 25 for millennials. The survey also found that Gen Zers:

  • Plan to save a median of 15% of their salaries.
  • $26,000 is the estimated median amount of all household retirement accounts.
  • $2,000 is the median amount of emergency savings to cover unexpected financial setbacks.

These are promising trends and may indicate that Generation Z prioritizes wealth building. Earlier this year, Fidelity Investments indicated the number of individual retirement accounts among Generation Z (ages 10 to 25) grew 146% to almost 275,000 accounts. Additionally, 53% of Gen Zers increased their contribution to 401K accounts.

According to the Bureau of Labor Statistics, 68% of US private industry workers have an employer-sponsored 401K retirement plan in 2021. It is essential that you are opting-in if that is what your plan requires you to do, and make consistent contributions to the plan. Make it easy on yourself by automating your transfers from your paycheck and arranging specific amounts to go directly to your 401K retirement account.

Many employers match your contributions partially or fully. A partial match means the employer provides half of the 6% of your annual salary you contributed. A full match is more generous. It means they will contribute the exact amount you did.  According to BLS and Fidelity, the national average employee match contribution is between 3% and nearly 5%. This savings feature from employers adds to your overall contribution, so don’t miss this opportunity.

Be aware that there are income and contribution limits on the tax benefits you can earn. Highly-paid employees aren’t able to participate at certain levels set by the IRS so they don’t get to benefit more than the average worker for tax advantages. In addition to a 401 K plan, you should set up an IRA account.

Roth IRA or Traditional IRA

For those not yet working and under 18 years, their parents can open a custodial Roth IRA or traditional IRA account. They may contribute to this account as long as they have earned income as a minor from sources such as babysitting, being a lifeguard, or being a camp counselor. Parents may add money to this account up to a $6,000 contribution limit in 2022, including their earned income. If your child earned $3,000, then parents may contribute $3,000 additionally. 

A Roth IRA is preferable to a traditional IRA with after-tax contributions, offering tax-free growth and tax-free withdrawals. If the minor has not yet generated income, parents can open a custodial taxable investment account in the meantime. This is a great way to have healthy money habits at a young age. Early savings allow compound growth over decades is an excellent way to have a healthy retirement.

Solo 401 K Qualified Plans

Some see Gen Zers as an entrepreneurial generation with 62% of them indicating they have started or intend to start their own business.  If Gen Zers start their own business, they can open a solo 401 K qualified retirement account, similar to those offered by companies. This account would be in addition to your IRA, and you can use it for retirement savings. To be eligible for a qualified retirement plan:

  1. there must be evidence of self-employment activity for purposes of generating income in order to cover the self-employed owner and spouse if he/she is working there and
  2. Absence of any other employees.

8. Gen Z Now Actively Investing

Gen Zers are actively investing,  and tend to seek high-risk investments over traditional investments in their portfolio. Investing is the best path to building wealth and having financial freedom. They use different tools (e.g., trading apps) and have greater exposure to digital assets like cryptocurrencies and NFTs. Robinhood is their platform of choice.

The Investopedia Survey reported that more than half (54%) of Generation Z between the ages of 18 to 25 years have investments, reflected proportionately:

  • Stocks 26%
  • Cryptocurrencies 23%
  • Mutual funds 12%
  • ETFs 7%
  • Index Funds 8%
  • NFTs 10%
  • REITs 7%
  • Commodities 5%
  • Options 8%
  • Other 2%

This report shows that Gen Zers have a strong appetite for high-risk investments where close to a quarter (23%) of those who responded have investments in cryptocurrencies and less than one in ten (8%) have investments in index funds below 10% for NFTs.

Gen Z is the most video-forward generation, obtaining knowledge from YouTube (45%) followed by friends and family (44%) while TikTok (30%) remains a major information source to boost their investor knowledge. No wonder you can find Fidelity on TikTok these days expand.

Chad Budy, Senior Investment Advisor, for Aptus Wealth Management, told us, “The average Gen Z’ers aren’t investing in bonds; conceptually that would be where most advisors say is the biggest risk. However, we are seeing many cryptocurrencies suffer from this rate correction, which obviously affects the spending power of the individual looking to purchase NFT, etc. on the blockchain since most of these transactions are done using Eth (aka Ethereum). I’ve noticed that a lot of folks in this generation are lacking an allocation to your more ‘traditional’ investments, as in stocks or bonds (that are not of the ‘meme nature’). I’ve always advised individuals in this generation to have a cash reserve of 6 months of living expenses, then invest in a traditional investment portfolio while using the cryptocurrencies and NFTs as ‘Satellite positions’.”

According to MagnifyMoney, four in ten investors (including 80% of Gen Zers and 60% of Millennials) have taken on debt to invest. These debt sources include credit cards, personal loans, and buying on margin.

Young investors showed a higher risk tolerance during the pandemic, benefiting from stimulus checks, trading more than investing, and supporting underdog stocks (i.e., meme stocks) like GameStop and AMC through Reddit forums. We raised our concern about the risk of chasing memes and other strategies.

Should Gen Z Take On So Much Risk?

It depends on what kind of market you’re in. In a raging bull market, it’s a no-brainer, not so much in a bear market. The market adjusts for economic changes and interest rates, providing us with both volatility and opportunities.

Generation Z investors who tend toward high-risk investments benefited from strong market returns through 2021. However, they haven’t been around long enough to experience significant market downturns.

Darryl Lyons, Co-Founder, and CEO of PAX Financial Group shared his thoughts with us, and said, “This idea is rooted in an area of study called Behavioral Finance. It can be implied that the same dopamine burst that we get from an NFT or crypto trade is the same feeling as a Fortnite Victory Royal.

“Although it scratches an itch, this non-traditional investing strategy should be done simultaneously with a disciplined long-term saving plan. The idea of disciplined savings seems entirely old school, but compounding interest doesn’t lie and it benefits younger savers exponentially. Think of it this way, if you can set up a savings plan where you invest 15% of your gross income monthly into stock-type funds, you have given yourself a permission slip to play the crypto and NFT markets with no regret.”

In other words, find ways to balance your risk. With the highest inflation in 40 years and the Fed’s tighter monetary policy scheduled to occur through the next year at least with higher interest rates, the stock market will remain turbulent for the intermediate future. That means more investing discipline is in order for investment portfolios. That doesn’t mean you can’t make money in downturns.

Several key investment strategies can help investors, especially during bumpy markets:

  • Buy and hold investment perspective looks out longer term than day trading which is challenging at the best of times.
  • Keep your portfolios diversified in different asset classes.
  • Consider low-cost index funds for diversification that track the respective markets such as S&P 500 like Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX).
  • Keep some liquidity in a money market account that is FDIC-insured and may benefit from higher interest rates keeping better pace with high inflation.
  • Take a look at Series I Government Savings bonds, sporting high yields of 7.12% (and higher yields likely in May) and could be attractive to offset higher risk investments.
  • Recognize risk-on investing carries significantly higher risk, especially with high-interest rates.
  • Value stocks tend to do better than growth stocks with rising inflation but not always. Some companies like Apple and energy stocks are able to pass on higher prices to consumers better than others.
  • Don’t panic or become emotional when markets become volatile, and sell your winners. Take a long-term approach and look for opportunities to buy that may arise.
  • Don’t time the market for the best time to buy or sell (and no, I am not being contradictory).
  • Avoid margin buying in any scenario but especially when interest rates rise.
  • Consider a human financial advisor to guide you through tough times.

Continue to learn about investing from experienced experts who admit they don’t know what will happen in the market day-to-day.

Final Thoughts

Generation Z is gaining ground in the workplace and the marketplace. Like generations before them, you’ll face challenges and choices. Mastering your financial management will help you to achieve your money and life goals.   

To ensure a financially secure future, create a budget that emphasizes more saving, and less spending, have an emergency fund for unexpected costs, avoid carrying costly credit card balances, and target a high credit score for maximum flexibility. Build your wealth by investing in assets, and balance your risks according to your age and preferences.

Thank you for reading, and find more articles on The Cents of Money

Are you a Generation Z-er and in the workforce? We would like to hear from you! Please share your thoughts, comments, or what we missed. Can we ask you to please share this article with others! Thank you in advance!

 

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