How the Recession Changed Gen Y

Millennials are interested in managing their own money but tend to be overly conservative. 

People without dependents can plan ahead to protect their future families

Experts say Gen Y will feel the impact of the recession for a long time.

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For millennials, the generation currently in their 20s and early 30s, the Great Recession hit just as they were getting their footing in the adult world: graduating from college, starting their first jobs and shaping their careers. According to several new surveys, that experience had a major impact on their attitudes and behavior toward money, and not always in a good way.

On one hand, millennials, also known as Generation Y, seem more interested in financial literacy and taking control of their financial management. In a survey last summer, the investment company Scottrade Inc. found that investors between ages 18 and 30 are the most likely to contribute to their portfolios on a regular basis. Eight in 10 Gen Y respondents (born between 1983 and 1995) said they regularly deposited money into their investment accounts, compared to just seven in 10 Gen Xers (born between 1967 and 1982) and five in 10 baby boomers (born between 1945 and 1966).

At the same time, millennials are also less trusting in the stock market as a means of long-term investing and less likely to make appropriately-aggressive investments with their retirement accounts. Hartford Funds, an asset management firm, notes that many millennials “are investing like 75-year-olds” – in other words, very conservatively. Indeed, a 2013 study by the Investment Company Institute found that three in four people under age 35 say they are not willing to take “above-average or substantial” investment risks.

[See: How to Manage Money in Your 20s.]

“Many of the perceptions that we form are formed between the ages of 18 and 22,” says John Diehl, senior vice president at Hartford Funds. During that time for millennials, he says, “if they weren’t experiencing economic turmoil themselves, they got to experience it through their parents, and that resulted in anxiousness.” As a result, millennials seem to have more trouble trusting financial institutions and with long-term investing.

The problem is that now is the time for millennials to jump into the market, to start saving for retirement when they are still young and have a long time for their investments to grow. “In our 20s and 30s, assuming we got a start on our career, is precisely the time we need to take the risk [of investing in equities],” Diehl says.

John Nauss, a financial consultant at TIAA-CREF and millennial himself at age 28, notes that young people are also facing unique hurdles that their parents didn’t face. “What’s different here is that they were facing the recession just as they were graduating … Some have mortgage-size student loan payments they have to pay, and they’re facing a job market with the potential for lower income,” he says.

As a result, he says, millennials often take longer to settle into their careers and feel financially secure enough to buy a home. One of the best moves his generation can make, he adds, is to start saving for retirement early, so investments have a long time horizon over which to grow.

Newer technology, such as online tools and apps that assist with investing and money management, might also help Is. Mike Sha, CEO of SigFig, an investment company that helps people fix and manage their portfolios through its online software platform and mobile app, says he also thinks young people are more hesitant to invest because of the recession. “We saw a generation of people who normally would have started thinking about investing for the future and getting 401(k)s set up sit on the sidelines. They were invested in ultraconservative portfolios, often completely in cash.”

[See: Why Gen X Lost Big in the Great Recession.]

That meant they not only lost out on the market gains that followed the recession, but they also continue to lose earning power because of inflation and low interest rates. Tools like SigFig can help correct those conservative tendencies, he says. “It’s meant to take a lot of the pain, effort and scariness of investing out as much as possible, especially for those who are not super sophisticated,” he says.

When users create accounts on SigFig, they are asked 10 questions designed to measure their desired risk level, and then the tool compares their existing portfolio to an “optimal” one. Nine out of 10 times, Sha says, users face “serious” issues, including not taking proper amounts of risk. For $10 a month (and for free for anyone with less than $10,000 in their accounts), users get help managing their assets.

Meanwhile, there are signs that the next generation, those still in high school, might also be coming of age under heavy influence of the most recent recession. A survey from Millennial Branding, a Gen Y consultancy, and the website Internships.com, found that high school students are more focused on their careers, and earlier, than previous generations. The survey of more than 4,700 students in January found that 72 percent of high school students want to start a business one day, and 42 percent feel they are under extra pressure to focus on their careers in high school because of the economy.

[Read: 25 Ways to Improve Your Finances.]

“High school students have a lot of pressure on them from their parents and the bad economy. … Parents know that half of college graduates are unemployed, underemployed or have given up on their search entirely and they want to prepare their children for their future,” says Dan Schawbel, founder of Millennial Branding.

Schawbel adds that the recession has created a greater sense of urgency around personal accountability when it comes to careers. “I think high school students understand this and it will be part of how they progress through their lives,” he says.

The recession’s impact, it seems, will continue to be felt for decades to come.