Why Millennials Still Don’t Save Enough

Debt is the biggest obstacle to better financial habits.

Man holds one of his pockets out showing that he is in debt.

Young people have shown an interest in saving, but they're unable to follow through because debt is holding them back.

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The Great Recession handed millennials a huge lesson about money early in their careers: They saw how quickly the stock market can go south, how hard it can be to land and hold onto a job and how difficult it can be to pursue the American dream when you’re drowning in debt. The results of the new 2014 Wells Fargo Millennial Study shows just how far millennials still have to go to achieve a level of financial well-being typically associated with adulthood.

While eight in 10 millennials say the recession taught them the importance of saving for the future, only 55 percent of the 1,639 millennials surveyed have actually started saving for retirement. Those who aren’t yet putting money away say they think they will be able to begin doing so at age 35 – far later than the age financial advisors recommend opening up a retirement savings account.

“They realize that the earlier they start, the more money they’ll have,” says Karen Wimbish, director of retail retirement at Wells Fargo. “They won’t have pensions, they will probably live longer and Social Security might be a smaller part of their retirement income.” But even though they grasp that reality, she says, their financial constrains make it difficult for them to actually get started doing what they know they should.

[Read: The Truth Behind Gen Y’s Financial Optimism.]

Debt is their biggest albatross. Four in 10 named debt as their top concern, and just as many said they are overwhelmed by it, compared to just 23 percent of baby boomers. Debts eat into a significant amount of monthly income, too, with credit card debt claiming 16 percent of millennials' paychecks, followed by mortgage debt (15 percent), student loan debt (12 percent), auto debt (9 percent) and medical debt (5 percent).

“For some of them, it’s absolutely crushing,” Wimbish says.

Medical debt, in fact, stands out as a surprising problem for millennials. Despite their youth, many have faced significant amounts of health-related costs, which continue to dog them. Gary Mottola, research director of FINRA Investor Education Foundation, says one in three millennials has unpaid medical debt, compared to 22 percent of baby boomers. Indeed, half of the 6,865 millennials in the 2012 FINRA survey​ worry that they have too much debt. “This is something that’s on their minds and pervades their generation,” Mottola says.

[See: How to Talk to Millennials About Money.]

The Wells Fargo survey also found that it’s those debts that are really holding them back. About half of millennials in the survey said more than half of their income goes directly toward paying off debt, and 56 percent said they are living paycheck to paycheck, unable to save for the future. Their top reasons for not saving for retirement include not having enough money to save (84 percent) and having more immediate priorities, like needing to pay off debt (77 percent).

Another problem is that their confidence in the stock market was shaken by the recession, which could hurt them over the long run, if they keep their money in safer spots that earn lower (or no) returns. Among the 1,529 baby boomers in the Wells Fargo survey, 66 percent​ say the stock market is the best place to invest, while just 59 percent of millennials are willing to say the same. Their hesitancy to invest, though, might fade with time, as we move further away from the recession: Last year, just under half of millennials were willing to call the stock market the best place to invest.

Even those who are invested in the stock marked tend to be putting their money in overly conservative spots, given their age and long time horizon. A significant number of millennials – 30 percent – say they have​ a quarter or less of their investments in stocks or mutual funds.

Pat​ Pearsall-Ramey​, a financial planning manager at Ernst & Young, says millennials are simply too inexperienced to know what to do with their money. “They don’t know how to make investment decisions. They are new to being investors, and they overreact,” she says. They might watch the news and see a worrisome story and sell their stocks, for example, whereas a more experienced investor would know that it’s usually best to hold shares (within a diversified portfolio) over longer periods.

Corrected on June 18, 2014: A previous version of this story misstated the source of Gen Y’s best advice to others. It came from Wells Fargo.