“I’m young and have years ahead of me to make more money, accomplish my goals and prepare for my future.”
That’s a sentiment I’ve had numerous times. Chances are you may have felt that way at one time, too, even if your early 20s are years behind you.
While optimism is a good thing, it appears to be almost too prevalent among the young. Being overly optimistic about your finances can potentially hinder smart financial planning, according to a survey conducted by financial planning startup LearnVest.
LearnVest surveyed 100,000 individuals and found that 6 out of 10 respondents under 25 reported feeling confident about their financial future and potential earnings, despite doing very little planning.
Those in the under-25 category — dubbed “the young and free” by LearnVest — are the least likely to have an emergency savings goal compared to older individuals. Only 16.8 percent of respondents under 25 are making emergency savings plans compared to 28 and 30 percent in the 25-34 and 35-44 age brackets, respectively.
“What we saw in our data is that people in their 20s feel like they have a better grasp on their finances than they do,” Founder and CEO of LearnVest Alexa von Tobel told The Atlantic. “They enter their 20s thinking juggling a daily budget is what financial planning is about. In their instincts, they feel that the way to solve financial problems is to earn more.”
While earning more can alleviate some financial stressors, it also comes with greater financial responsibilities, such as saving for bigger life expenses such as retirement. The LearnVest survey also revealed that as individuals start taking on more financial responsibility in their 30s and 40s, their confidence declines, even for those in higher income brackets.
Even though income growth typically picks up in the 25-34 and 35-44 age brackets, financial confidence during those years often dips lower. Middle-aged individuals may feel “spread thin,” according to the LearnVest report, as they start families, take on mortgages and set other long-term financial goals along with saving for retirement.
As people get closer to retirement (55-years-old and up) and have a better idea of what their personal finances will really be like when that portion of their life begins, only then does financial confidence begin to peak again.
The financial optimism curve shows that the overconfident sentiments of 20-year-olds are not new, according to LearnVest’s von Tobel. Overconfident young adults save little in their 20s, hustle to compensate in their middle years and eventually begin to level things out, but that’s a pattern financial education could alter.
“Better financial literacy could help inspire younger generations to save earlier when time — and compounding interest — is on their side,” said von Tobel.
The Certified Financial Planner Board’s 2013 Household Financial Planning Survey found that increased financial planning increases overall confidence. And the more planning you do now, the better off you’ll be later.
Seems logical enough.
So, if you are a young adult looking to start off the year on a positive financial note, consider directing more of each paycheck into a savings or 401(k) account. It may feel like you have everything under control right now, but it wouldn’t hurt to be over-prepared later.
And that advice is based on statistical evidence, not just comments from your parents.
I know I’ll be taking my 2015 financial resolutions and emergency savings plans even more seriously now.