Many behaviours are influenced by life experiences, including how we save and think about saving. How Baby Boomers save differs from how Gen X saves, which differs from how Millennials save.
Each generation has lived through different market and economic environments that shaped their views on saving, and as result individuals across each of these generations exhibit different savings patterns.
A brief history of recent recessions
The last time we had a lengthy recession with high inflation was in the early 90s, when the workforce consisted of just three generations: Silent (1928 to 1945), Baby Boomers (1946 to 1964), and some Gen Xers (1965 to 1980).
Then came The Great Recession in 2008 – economically devastating, especially in the U.S. But, inflation stayed below 4% there, and didn’t get much higher than 2% in Canada.
Fast forward to 2017, by which time two more generations had entered the workforce: Millennials (1981 to 1996) and Gen Z (1997 to 2012).
The onset of the COVID pandemic caused economic activity to crater and triggered a recession in early 2020. With this, all five generations had seen a recession. But, some feel Gen Z hasn’t truly experienced a recession, since this one was so short lived, and some Gen Zers weren’t born until after the recession ended.
Coming of age during The Great Recession
Millennials entered the workforce during and shortly after the Great Recession. They were hard hit as student loan debt made it difficult to establish financial stability and independence. The thinking and savings habits of those who came of age during this time appear to have been greatly affected by this experience.
While Gen Z might not have been of working age during the global financial crisis, they would’ve experienced it through the lens and lives of their parents, many of whom lost their homes or became unemployed. And then once they started their careers it wasn’t long until the COVID pandemic delivered another blow that would make them that much more careful with their hard-earned money.
Generally speaking, Gen Zers are even more frugal and pragmatic than Millennials. They are averse to traditional capital market investments like stocks, bonds as well as ETFs and mutual funds that invest in those asset classes. They don’t trust the stock market. Instead, they favour alternative investments like cryptocurrency, real estate and private equity, according to a 2022 Bank of America survey.
Gen Z began saving for retirement at a median age of 19, which is the youngest of any generation, based on the 22nd Annual Transamerica Retirement Survey, conducted in late 2021. By comparison, Millennials started saving at a median age of 25 and Gen X at a median age of 30.
The Transamerica survey also tells us that while more Millennials than Gen Zers make regular contributions to retirement accounts, the latter group saves more by setting aside a median 20% of their income for retirement plans, versus the median 15% contributions made by Millennials.
Generational responses in 2022
According to a recent LinkedIn Workforce Confidence Index report, 74% of Millennials said they would cut back on their spending and by much more than older generations.
Fully 78% of Gen Z adults said they too would be cutting back, on fears of further deterioration in the health of the U.S. economy. Gen Zers were also cited as more likely to delay big-ticket purchases or even sell possessions, in order to have some extra cash on hand.
Gen Z is more fearful of and prepared for a recession because this would be the first many of them experience as working adults. Their fear is heightened because they don’t know what to expect and have heard awful stories about what can happen during a recession.
Older generations are presumably less fearful because they have a better idea of what to expect and an awareness that most people eventually overcome financial hardship, based on their lived recession experiences.
Changed habits and attitudes around saving
The economic impacts of the pandemic compelled Gen Z to re-evaluate their financial priorities. There wasn’t much time for this cohort to build emergency funds to draw on while facing unemployment or skyrocketing food, energy and housing costs.
Millennials are consistently taking a more conservative approach to their finances than their parents’ or grandparents’ generations, according to a 2017 report from Merrill Edge, partly because of their experience in the 2008 recession and its aftermath.
Key events like market collapses and recessions have defined generations, in particular their thinking as it relates to important financial matters like how we save and think about saving.
What kind of savers will Generation Alpha, or those born after 2012, be? Only time will tell, but let’s hope they come of age in less challenging times than the last two generations.