Our very own researcher, Dr. Jung, stressed the importance of understanding the link between generational gap and the financial capability by behavior. Her theory is explained below.
The 2018 National Financial Capability Study (NFCS) provided the data for understanding financial capability across different generations. The study sampled 26,349 individuals and categorized them into four generational groups: Pre-Boomer (ages 71 and over), Boomers (ages 52 - 70), Generation X (ages 36 - 51), and Millennials (ages 18-35).
Financial capability was evaluated based on the usage of common financial products and the possession of financial management skills. The financial products considered included checking and savings accounts, emergency funds, retirement savings, and investment accounts. Financial management skills assessed were the ability to pay bills on time and pay off credit card balances in full each month.
Graphical analysis from the study indicates that Millennials are likely to be financially vulnerable. This vulnerability stems from limited engagement with mainstream financial products such as retirement plans and investment accounts. Moreover, Millennials tend to rely heavily on credit cards, often failing to pay off the full balance monthly. They also frequently use alternative financial services, such as payday loans and pawnshops, which typically carry higher interest rates and offer minimal financial benefits.
Financial capability was evaluated based on the usage of common financial products and the possession of financial management skills. The financial products considered included checking and savings accounts, emergency funds, retirement savings, and investment accounts. Financial management skills assessed were the ability to pay bills on time and pay off credit card balances in full each month.
Graphical analysis from the study indicates that Millennials are likely to be financially vulnerable. This vulnerability stems from limited engagement with mainstream financial products such as retirement plans and investment accounts. Moreover, Millennials tend to rely heavily on credit cards, often failing to pay off the full balance monthly. They also frequently use alternative financial services, such as payday loans and pawnshops, which typically carry higher interest rates and offer minimal financial benefits.
Individuals' financial behavior were classified using Latent Classes Analysis. 4 classes were identified, they are: 1) Financially well-off; 2) Alternative Financial Services users (AFS); 3) Credit-Card Relying (CC-relying); 4) Financially Vulnerable.
As seen on the graph, Financially vulnerable group predominantly consists of Millennials and Gen X, who are also more likely to rely extensive on credit cards. Another notable trend is observed with the AFS users, largely made up of Gen X and Millennials. Unlike 'unbanked' who lack access to basic banking services like checking and savings accounts, AFS users are often 'underbanked.' While they may have access to basic financial products, their utilization is limited by factors such has low-income and financial instability.
Despite these limitation, many in these younger groups actively participate in non-retirement investments, such as the stock market. This behavior is concerning as these individuals often rely on alternative financial services, like payday loans, to fund risky investments which could serve as their primary or secondary sources of income. Without traditional safety nets like retirement funds or emergency savings, these individuals are particularly vulnerable to unexpected financial challenges.
The patterns of financial service usage and product access vary significantly by generation, yet financial education and services are often too generalized. It is critical to develop age-specific financial education programs that address the unique challenges and needs at different life stages. These programs should consider key life events such as childcare, housing, education, and long-term care, ensuring that financial advice and services are relevant and effective.
As seen on the graph, Financially vulnerable group predominantly consists of Millennials and Gen X, who are also more likely to rely extensive on credit cards. Another notable trend is observed with the AFS users, largely made up of Gen X and Millennials. Unlike 'unbanked' who lack access to basic banking services like checking and savings accounts, AFS users are often 'underbanked.' While they may have access to basic financial products, their utilization is limited by factors such has low-income and financial instability.
Despite these limitation, many in these younger groups actively participate in non-retirement investments, such as the stock market. This behavior is concerning as these individuals often rely on alternative financial services, like payday loans, to fund risky investments which could serve as their primary or secondary sources of income. Without traditional safety nets like retirement funds or emergency savings, these individuals are particularly vulnerable to unexpected financial challenges.
The patterns of financial service usage and product access vary significantly by generation, yet financial education and services are often too generalized. It is critical to develop age-specific financial education programs that address the unique challenges and needs at different life stages. These programs should consider key life events such as childcare, housing, education, and long-term care, ensuring that financial advice and services are relevant and effective.