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Picture of Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

Gen Z still needs help with money

Tennessee is one of about 30 states that mandate financial literacy education in schools. Hamilton County is emerging as a leader in the state, elevating basic finance to a core requirement and adopting a robust new curriculum. All good and deserving of praise.

A recent study from credit bureau TransUnion demonstrates just how much more work remains to be done. The comprehensive survey, called “Solving for Gen Z”, illustrates some of the challenges facing the youngest cohort of American adults as they emerge into a world of sticky inflation, mounting debt, and TikTok influencers preaching the gospel of spending. Despite being the best educated, most privileged generation in history coming of age in an era of unprecedented access to information and technology, much of Gen Z is failing at finance.

TransUnion looked at a slice of the youngest adult segment, age 22-24, and compared their financial condition to the same age cohort a decade ago, members of the Millennial generation at the same stage of their lives. Compared with their immediate predecessors, Gen Z carries more debt relative to their income including about 25% more credit card debt adjusted for inflation. That translates into about 15% lower take-home pay after debt service obligations.

They also face higher delinquency rates on credit cards, auto loans and student debt than Millennials at their age. According to the New York Fed, 15% have maxed out credit cards, double the national average. They also borrow even more via alternative credit modes like Buy Now Pay Later. Gen Z saw their average FICO score fall by 24 points over the past 4 years, and 31% still live with their parents.

What’s going on here? One interesting result from the TransUnion survey compared the reactions of the two generational subsets to the seminal crises of their formative adult years. 75% of Gen Z respondents said the Covid-induced recession negatively impacted their financial condition, compared with only 60% of Millennials who say they suffered materially from the Great Financial Crisis, an objectively more ominous economic event in retrospect. The answer seems to lie in how each cohort perceives their environment and how their perceptions are shaped by their media consumption. Think TikTok.

The national security implications of such a voracious data vacuum owned by the Chinese are manifest, a threat recently taken up by Congress. Yet it poses another risk nearly as insidious: Gen Z relies more than any other generation on TikTok, YouTube, and other social media for financial advice while also sustaining a relentless barrage of pressure from influencers to overspend on luxury goods and experiences.

Peer pressure is hardly new; a comic strip called “Keeping Up with the Joneses” ran in daily newspapers from 1913 to 1940. But the sheer immersion, volume, and immediacy of social media exposure has had a measurably negative impact on the attitudes of many young adults that is impeding their financial wellbeing.

The social media pressure to overspend, embodied in trending memes like “self-care” and the proliferation of “haul vids” showing off expensive acquisitions on YouTube has engendered so much angst that it spawned its own descriptive term: money dysmorphia. Borrowed from a psychological term for obsessive concern over perceived physical flaws, money dysmorphia is a distorted or overly pessimistic attitude toward one’s financial prospects, and it has afflicted Gen Z more than any previous group.

Financial pressures, both real and self-inflicted, are weighing on the psyches of Gen Z. According to the American Psychological Association, younger adults report increasing stress levels, averaging a level of 6 on a scale of 10 compared with 3.4 for those over 65, with 67% saying they are “consumed” with worries over money.

These results mirror anecdotal evidence, leading to a sense of despair over longer term goals like buying a home or retiring comfortably, further increasing pressure to boost current consumption. “Doom spending” is another popular TikTok meme, encouraging living for the moment with expensive travel and trendy products. A recent survey from McKinsey and Company reports that 61% of Gen Z plans to splurge in 2024, compared with 34% of Gen X and 19% of Boomers. The hashtag #TikTokmademebuyit has received over 12 billion views.

Of course, it must be remembered that these are broad generalizations that do not apply equally to all members of Generation Z. McKinsey finds that every generation can be sorted into distinct consumer segments driven by value, quality, or image, and as we have previously noted, many Zoomers are pushing back by conspicuously posting about their frugality and financial responsibility (so-called “loud budgeting”). But in the aggregate, Gen Z continues to spend even as other age cohorts are pulling in their horns in the face of sticky inflation.

The challenge of countering doom spending and money dysmorphia is daunting. Investment company TIAA reports that despite the increase in basic finance education in American schools, Gen Z demonstrates the lowest level of basic financial literacy. Nearly 3 in 4 say they are so pessimistic about economic conditions they see no reason to set financial goals. The right answer, of course, is that setting goals becomes even more important.

Each of us has a role to play, by supporting expanded financial education in schools, mentoring and encouraging young adults in our ambit, and setting a better example ourselves by tackling our own national fiscal profligacy before bequeathing even more financial pressure to Gen Alpha.

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