By Sarah Hauer
Milwaukee Journal Sentinel
Go to school. Get a job. Save. Buy a house. Invest.
The basic moves to ensure a healthy financial future seem easy enough. But for some people just entering the workforce, it feels like the rules have changed.
Those who were still growing up during the financial crisis in 2007 wonder: Are smart financial moves still the same?
“The rules are always changing,” said Brian Jacobsen, chief portfolio strategist for Wells Fargo. “Every generation has had to deal with changes in technology, cultural norms, politics and economics.
“The young adults of today were children during the global financial crisis. They may have been affected by seeing their parents’ anxieties, but parents may have been more affected than kids in terms of attitudes.”
During the global financial crisis, stocks tanked and unemployment rose. The labor force dealt with job losses and insecurity. Once notable saving and investment portfolios were near worthless.
“The Great Recession made homeowners and business decision makers more risk averse,” said Marquette University professor Mark Eppli.
“Prospective homeowners no longer look at home ownership as a great low- or no-risk investment with near certain upside. Business executives quickly cut expenses after the Great Recession to maintain or grow profitability. However, they have been very slow to invest in new ventures to raise top line revenue.”
Here are some examples of how young adults are dealing with, or ought to be dealing with, common financial issues.
Rebecca Murray, 28, graduated from the University of Wisconsin-Milwaukee with a degree in social work and $30,000 in debt. She’s worked multiple jobs at nonprofits and a university since leaving school.
Murray’s $30,000 debt was above the average for students who take out a loan while in college. With a disciplined payment plan and a $5,000 education stipend through Americorps, Murray has paid down her debt to about $8,000 since graduating in 2011.
People just starting out today have more debt than their parents’ generation did at the same age.
“(My mom’s) life was so much different than mine,” Murray said. “She didn’t go to college. If she would have, tuition was so much cheaper. You could get a job and keep it for decades. It’s a different environment now.”
While taking on debt to increase future earnings can pay off, don’t take out more than you can handle in a future profession, experts say.
Traditional wisdom says getting out of debt is a key to a healthy financial future. Debt will likely accumulate at a higher interest rate than a bank account earns. For credit card and student loan debt, that certainly holds up.
Rebecca Neumann, a professor at UWM who teaches a course in the economics of personal finance, said paying off debt is like writing yourself a check because it offsets the effects of compounding interest.
“Pay yourself first: Put extra money toward debt,” Neumann said.
Before the financial crisis, everyone was encouraged to buy a house.
Historically, about two-thirds of adults owned homes, and the rest rented. Home ownership peaked in the early 2000s near 70 percent. Home values appreciated in the double digits each year. Then the housing market bubble burst, and the foreclosure crisis overwhelmed the country.
Eppli, a professor in the finance and real estate programs at Marquette, doubts we’ll see those returns on housing again. But with housing now appreciating at least at the rate of inflation, buying a home remains a solid decision.
Eppli said the largest problem posed by home ownership is being anchored to a specific location. The labor force, particularly in entry-level work, is increasingly mobile. Especially if you’re under 25, he said, you should focus on maximizing your “human capital” and take advantage of career opportunities that may draw you away from a home.
Since the housing crisis, for many people buying a house has shifted from being an investment designed to accumulate wealth to being a consumable good.
Eppli said a good, long-standing rule that holds true today is to try to keep housing costs (rent or mortgage) under 30 percent of income.
Murray bought a house just outside Milwaukee with her fiance about a year ago. The couple found a foreclosure and took advantage of a loan through the Federal Housing Administration that let them pay a smaller down payment.
Murray at first didn’t plan to buy. The pair had been renting when their wedding planning began. After realizing a downtown wedding would exhaust their savings, she chose to forgo that costly plan and instead decided, “Why don’t we use that money to buy a house?”
Now their $900 mortgage payment is similar to what used to go to rent each month.
Joe Szozda worked step-by-step on becoming financially sufficient since graduating from VICI Beauty School in Milwaukee.
He moved into his own apartment. Bought a car. And, as of writing, was set to soon close on a house.
His employer doesn’t offer a 401(k) plan, so deciding to save for later in life is up to him. Retirement feels pretty far off for the 25-year-old hairstylist.
That’s the next step in his financial plan.
Brenda Campbell, president and CEO of Make a Difference Wisconsin, said she notices how responsibility for healthy
finances rests with the individual more than before. Make A Difference Wisconsin works through schools to educate teens about finances.
“Thirty years ago a lot of employees had pension plans, so their employer was looking out for their retirement years. Now it’s really on the individual,” Campbell said.
People entering the workforce today likely have to work a string of temporary or contract jobs before landing a full-time position with benefits. That means until they can enroll in a 401(k) program and take advantage of an employer’s matching contribution to the retirement plan, long-term saving is up to them.
Interest rates are low right now. So it’s a good time to borrow, but not the best time to grow your money in a traditional savings account at the bank.
Still, that’s what many young people are doing. A survey by personal finance website NerdWallet found that 63 percent of people ages 18 to 35 save for retirement in a savings account. A better idea, experts say, is to put money in a Roth IRA that anyone can set up. After-tax income deposited into a Roth IRA can be withdrawn, tax free, after age 59 1/2.
Dan Pappas, a 24-year-old recruiter, enrolled in his employer’s 401(k) retirement savings plan when he started working at human resources consultancy ManpowerGroup.
He’s in a rent-to-own agreement with his landlord but doesn’t think he’s ready to make investments through mutual funds or their riskier alternatives, individual stocks.
He feels hampered financially by student loans. Pappas took on over $30,000 in debt for his degree in business management from the Milwaukee School of Engineering. Since graduating in 2015, he’s paid off a few thousand dollars.
“The longer it sits there, the harder it makes it to do anything else,” Pappas said.
He’s working with a financial adviser to assess when would be an appropriate time to put his money in the market.
For Pappas and many young adults, all the options for saving and investing are daunting. Some of the weariness comes from witnessing the 2007-’08 economic downturn. A 2015 report by money management giant BlackRock showed 46 percent of young people believe investing is too risky.
“The time isn’t right now,” Pappas said. “It’s on my radar.”