Gen Zers Are Overly Optimistic About Being Wealthy

U.S. dollar banknotes are shown in a picture taken on Dec. 7, 2021. Ozan Kose/AFP via Getty Images

Commentary

Gen Zers, according to a recent Magnify Money survey, are overly optimistic about being wealthy. In fact, according to the survey, they are the most financially optimistic generation. To wit:

“Nearly three-quarters (72 percent) of Gen Zers believe they’ll become wealthy one day, making them the most financially optimistic generation.”

But, interestingly, that optimism, as noted by the firm’s executive editor, is “more than just youthful optimism.”

“We are surrounded by extremes of wealth and poverty, and I think younger folks naturally gravitate to the more positive extremes. What’s more, the concept of investing is so much more accessible today, and I know many Gen Zers believe they can harness the power of the market to build wealth” said Ismat Mangla, senior director of content at LendingTree.

Interestingly, while Gen Zers are optimistic they can use the stock market to build wealth, that hasn’t worked out well for the generations before them.

Since 1980, there have been three major bull market cycles. The first started in the mid-1980s and culminated in the dot.com bust at the turn of the century. The early 2000s saw the inflation of the “real estate” bubble heading into the financial crisis of 2008–09. We’re now in the third “everything bubble” fueled by a decade-long push of monetary and fiscal interventions.nHowever, after these three major bull markets, which provided significant wealth-building opportunities for baby boomers, Gen Xers, and millennials, they are are not “wealthy.” According to some of the most recent surveys and government statistics:

• Forty-nine percent of adults ages 55 to 66 had no personal retirement savings in 2017, according to the U.S. Census Bureau’s Survey of Income and Program Participation (SIPP).
• The latest Federal Reserve Survey of Consumer Finances found that the median savings in Americans’ retirement accounts were $65,000.
• Less than half of those surveyed saved $100,000—which is not enough to support a median income of around $40,000 a year in retirement.
• One in six say they have saved nothing. A third currently make no contributions to retirement savings.
• Eighty percent of people expected to see their living standards fall in retirement, while 10 percent feared they wouldn’t be able to retire at all.

Will it be different for Gen Zers in the future? Unfortunately, it likely won’t be for the same reasons that using the stock market to build wealth didn’t work for the generations before them.

Eighty Percent of Americans Aren’t Wealthy

According to the Magnify survey, Gen Zers defined “being wealthy” by several measures. Most surveyed define “wealthy” as living comfortably without concern about their finances. That goal has eluded all but the top 20 percent of income earners, as shown below.

Source: Federal Reserve Bank of St. Louis / Refinitiv chart: RealInvestmentAdvice.com

While 72 percent of Gen Zers believe they will be wealthy, the net worth of the bottom 50 percent of Americans has remained relatively unchanged since 1990. While the middle 50–90 percent of Americans have seen an increase in net worth, it has not been enough to keep up with the standard of living which, as discussed previously, continues to push Americans further into debt.

“The current gap between savings, income, and the cost of living is running at the highest annual deficit on record. It currently requires roughly $6,300 a year in additional debt to maintain the current standard of living. Either that or spending gets reduced, which is the likely outcome as a recession becomes more visible,” according to the one chart to ignore (below).

Source: Federal Reserve Bank of St. Louis / Refinitiv chart: RealInvestmentAdvice.com

Another Magnify Money survey also supports this bit of analysis by showing that roughly 50 percent of working Americans live “paycheck to paycheck,” meaning they have no money left after expenses. While that was common among those making less than $35,000 annually (76 percent), 31 percent of those making more than $100,000 experienced the same.

The critical point is that it is hard to count on the stock market to build wealth when you don’t have excess savings with which to invest.

The Stock Market Won’t Make You Wealthy

Generation Z, born between 1992 and 2002, was between five and 16 years old during the financial crisis of 2008–09. This is important because they have never truly experienced a bear market. Any advice they might have received from financial advisors suggesting caution, asset allocation, or risk management was repeatedly proven to underperform the market.

However, since they became old enough to open an investment account, they have only seen a “liquidity-driven” bull market that fostered a generation of those who “buy the [expletive] dip.”

Source: St Louis Federal Reserve, Refinitiv Chart: RealInvestmentAdvice.com

However, while the lack of savings was one of the key points in “the one chart to ignore” above.  the other key point—which is why 80 percent of Americans didn’t build wealth—is that “markets don’t compound returns.”

“There is a significant difference between the average and actual returns received. The impact of losses destroys the annualized ‘compounding’ effect of money. (The market historically has an ‘average’ return of 7 percent annually. However, the differential between the promised and ‘actual return’ is the return gap.)”

While 26 percent of Gen Zers think that investing in the stock market and 19 percent in cryptocurrencies will be their tickets to financial wealth, a lot of financial history suggests this will not be the case.

While Gen Zers are very optimistic they will be wealthy in the future, a mountain of statistical and financial evidence argues to the contrary. Will some Gen Zers attain a high level of wealth? Absolutely—roughly 10 percent of them. The remainder will likely follow the exact statistical breakdown of the generations before them.

The reasons for that disappointing outcome remain the same. If investing money worked as the mainstream media suggests, as noted above, then why, after three of the most significant bull markets in history, are 80 percent of Americans so woefully unprepared for retirement?

The crucial point to understand when investing money is this: the financial market will do one of two things to your financial future: 1. If you treat the financial markets as a tool to adjust your current savings for inflation over time, the markets will keep you wealthy. 2. However, if you try and use the markets to make you wealthy, the market will shift your capital to those in the first category.

Experience tends to be a brutal teacher, but it is only through experience that we learn how to build wealth successfully over the long term.

How Money Really Works

It isn’t just about investing money. There are also vital points about the money itself.

1. Your career provides your wealth.

You most likely will make far more money from your business or profession than from your investments. Only very rarely does someone make a large fortune from investments, and it is generally those that have a business investing wealth for others for a fee or participation. (This even includes Warren Buffett.)

Focus on your career, or business, as the generator of your wealth.

2. Save money—a lot of it.

“Live on less than you make and save the rest.” Such sounds simple enough, but is exceedingly difficult in reality. Given that 80 percent of Americans have less than $500 in savings tells the real story. However, without savings, we can’t invest to grow our savings into future wealth.

3. The true goal of investing money is to adjust savings for inflation.

As investors, we get swept up into the “casino” called the stock market. However, the true goal of investing is to ensure that our “savings” adjust for future purchasing power parity in the future. While $1 million sounds like a lot today, in 30 years it will be worth far less due to the impact of inflation. Our true goal of investing is not to beat some random benchmark index by taking on excess risk. Rather, our true benchmark is the rate of inflation.

4. Don’t assume you can replace your wealth.

The fact that you earned what you have doesn’t mean that you could earn it again if you lost it. Treat what you have as though you could never earn it again. Never take chances with your wealth on the assumption that you could get it back.

5. Don’t use leverage.

When someone goes completely broke, it’s almost always because they used borrowed money. Using margin accounts, or mortgages (for other than your home), puts you at risk of being wiped out during a forced liquidation. If you handle all your investments on a cash basis, it’s virtually impossible to lose everything—no matter what might happen in the world—especially if you follow the other rules given here.

6. Whenever you’re in doubt, it is always better to err on the side of safety.

If you pass up an opportunity to increase your fortune, another one will be along soon enough. But if you lose your life savings just once, you might never get a chance to replace it. Always err on the side of caution. Always ask the question of what can go “wrong” rather than focusing on what you hope will go “right.”

Investing money in your future is not as simple as much of the media makes it seem. We all want to be able to under-save today for tomorrow’s needs by hoping the markets will make up the difference. Unfortunately, there is no magic trick to building wealth.

The process of saving diligently, investing conservatively, and managing expectations will build wealth over time.

It’s boring—but it works.

No matter your current age, it’s not too late to start making better choices.