Inflation is to Boomers what the bear market is to Generation Y

12 05 2007

This week I had a really inspiring conversation with Jason from Wesabe. He was very open about how they have been successful and how they’ve connected with the community of users who are active in personal finance. When we were talking, he mentioned that the blog post he wrote on what holds people back from getting their financial house in order really catalyzed interest in what they were doing. I went back and re-read it and it reminded me of a Mintel research paper I also re-read recently.

Their argument goes like this:

Baby Boomers are notoriously bad savers. They’re labeled as the “me” generation and in comparison to their parents who lived through the Great Depression, they are generally regarded as spendthrifts. However, the article points out that during their coming-of-age period in the 70s the US experienced heavy inflation and it was widely perceived that a dollar saved was a dollar lost, since inflation quickly eroded buying power. So Boomers never learned to save, since they felt that putting money aside was actually irresponsible. In light of this generational context, Boomers’ reputation as poor savers makes a bit more sense.

Another interesting phenomenon is that Generation Y’s investment outlook is very conservative, with many of them investing their 401(k) or IRA assets in low-risk/low-return bond and money market funds (though some of this may be a result of auto-enrollment programs at their companies). In fact, on the whole, they are more conservatively invested than their parents who are getting close to retirement. The article that pointed out this trend attributed this to the fact that Gen Y came of age during the bear market of 2001 and 2002 when the bottom dropped out of the “New Economy.” Another example of financial behavior driven (at least in part) by an event that left a lasting impression.

Even if we know what to do, as Jason pointed out in his blog post, there are some other key challenges facing consumers, namely their own perception of the utility of money and how they relate to it on an individual basis. Personally, I’ve never made more than $25,000 in a year and my expenses are all very low, which I think this is based on a (perceived) need for flexibility and doing exactly what I want to be doing. While I feel quite confident that I’m the general exception for Gen X, I do fit in nicely with Wikipedia’s description of some of my cohort group’s key characteristics: