It was early morning and the sunlight was peeking through the windows of the coffee shop. The smell of freshly brewed coffee, the pleasant jazzy tune in the background, early office workers catching up, sharing the latest gossip. The calm, stress-free atmosphere of this place makes me come back every morning. Only this time something was not quite right.
A young couple was sitting at a nearby table. They were having one of those “serious” talks that all couples have… Fine, may be not at 7:30 a.m. As you could guess by the headline, the topic of their conversation was… money!
“I am not getting paid until the end of the month,” she said to him with a gloomy face. “I just didn’t expect this to happen. I wasn’t ready. I’ll need to apply for a loan” he replied nervously.
Hearing those lines didn’t necessarily surprise me, until I opened my tablet and the first thing I read was some research showing that 62% of Americans feel stressed about money*. And one-third admit that financial matters make them lose sleep at night. As someone that’s been working in the financial industry for over 35 years, I was naturally struck by the finding.
Is money management as difficult as it was back in the “old days”? How has our relationship with money evolved since I myself was a young student? Have financial institutions changed for the better? As hindsight is 20/20, a brief trip into my past could maybe help answer some of these questions.
I Wish I Knew…
The bank is not your dad
Heading off to university was an exciting time for me. It meant moving out from my parents’ house — freedom that comes at a certain price. Apart from going deep into modern philosophy (my degree), I had to learn how to prepare a “decent” meal, avoid over-dosing on coffee and, of course, manage my finances.
My first serious move was to open a bank account. To do so, I had to go to a bank branch, wait in line, have a one-to-one talk with an account officer, sign a big pile of documents and, only then, receive my “precious” bank account number.
At the time, I was also excited about the idea of saving. I worked during all my holidays in bars and restaurants. As someone who’s been interested in finances from an early age, I knew leaving money under the mattress wasn’t an option.
“What saving products do you have for me?” I asked the bank officer in hopes of finding a wide variety of alternatives. That didn’t happen. “Will a savings account do, sir?” he replied.
But the lack of options was not the only thing bothering me. Every time I wanted to deposit or withdraw money, I had to visit the bank. It felt a lot like if the bank was some sort of relative that I had to visit every week. I even had to ask permission if I wanted to withdraw funds!
Today, I not only have multiple bank accounts and digital wallets with competitive offerings, but they are all accessible from my smartphone. Plus, the widespread use of ATMs and cards has reduced the power of banks to manage our financial freedom. Yes, there are still withdrawal and spending limits in place. Prepaid card solutions like the Crypterium Card now offer surprisingly high daily and monthly limits.
Compound interest is a lifelong friend
Despite struggling to find a good savings account, I always thought of compound interest as one of the most reliable ways to build wealth over time. I am not alone. Even Albert Einstein once said: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
Compound interest is essentially generating interest on top of interest. That said, it is evident that the earlier you start, the higher the future returns. A recent study from consulting giant Ernst & Young reveals that over 65% of millennials are making just enough or less than enough to live**, leaving them little room to consider sophisticated investment opportunities.
In this context, compound interest becomes extremely useful, as it allows you to start with a really low initial investment and, over time, turn it into a small fortune.
Let’s take a simple, very conservative example. Today you deposit $100 into a savings account with 5 percent interest rate and match that investment each month. If you don’t change anything and leave the account running for 50 years, you end up with $250,000. See the point?
Conservatism doesn’t help your pocket
Most of us will experience multiple economic recessions over the course of our lives. When I was lucky enough to enter Oxford University, the UK was fighting stagflation and there was a strong decline in traditional British industries. By the time I graduated, the economic situation wasn’t at all promising — it was tough to get a job. The 1980’s in the UK kicked off with sharp falls in earnings and rising unemployment.
Unfortunately, it seems that economic crises do resonate in our heads and affect our attitudes to money. A survey by Investopedia found that half responders under the age of 35 felt “somewhat” or “very concerned” about facing a market downturn.
That might explain why today’s twentysomethings are investing too conservatively, as pointed out by a 2016 research by Lindsay Larson, an assistant professor at Georgia Southern University. Apparently, the younger generation is saving through traditional deposits or bonds — most suitable for people closer to retirement.
Broad investment portfolios usually include a variety of financial tools, such as money market funds, certificates of deposit (CDs), bonds, mutual funds and stocks. The mix of investments should be aligned with your savings capacity, your risk appetite and your goals.
But here is the thing: your 20’s might actually be the best time to engage in higher-risk investments. Two reasons: you have a long way to go until retirement knocks on the door and you can afford to ride out potential downturns.
Investment management firm Vanguard analysed annual returns of people with conservative, balanced and aggressive portfolios from 1926 through 2015***. The study showed that the average return for high-risk portfolios is 10.1%, against 5.4% offered by the most conservative options. In other words, being gun-shy about investing could be a costly long-term mistake.
Government pensions will not save you
Financial needs are very much related to our life stages. When we first move out from our parents’ homes, we become students, we want to be able to pay for things easily and borrow small amounts of money, from time to time (like the couple in my cafe). Then, when we start setting up a family, having a stable well-paid job, we want to save money and, at the same time, we commit to big expenses, such as a car or a mortgage. As we pay off our debts and start saving more, we finally start to think of retirement. Those financial cycles haven’t changed really. But they now have to, especially when it comes to retirement.
Not today. Not in 10 years. Not even in 50 years. But public pensions are reducing and going away. The improvements in medicine are helping us to live longer lives — the 100-year life is now a probability for many millennials. For the government, that means paying pensions for more years than systems were originally designed to handle.
A report by the World Economic Forum**** even refers to the pension systems in the US, UK, Japan, Netherlands, Canada and Australia as “global time-bombs” as public pension funds are expected to fall short by $224 trillion by 2050. According to the document, that might be “the biggest pension crisis in history”. If you add China and India to the mix, the shortfall goes up to $400 trillion. That’s five times the size of the currency global economy!
Governments are fully aware of this perilous situation and they are not wasting time. Despite the huge political consequences, public administrations all over the world are increasing the age at which men and women can retire. Meanwhile, pensions move in the opposite direction.
“The anticipated increase in longevity and resulting ageing populations is the financial equivalent of climate change,” explains Michael Drexler, head of financial and infrastructure systems at the World Economic Forum.
With this reality in mind, it is essential that everyone thinks seriously about retirement savings, aside from what the government may or may not provide later on in life. From interest bearing accounts to property, there are plenty of alternatives to “secure” a stable income in the future.
Budgeting is a necessary evil
In the meantime — boring, time-consuming, complicated and hard to follow. Yes, I am talking about budgets. Back in university, I knew I had to stick to a certain budget if I wanted to survive. But the simple idea of actually sitting down and counting was tiresome.
Budgeting can help you cut down unnecessary expenses and give that money to a better use. Whether you live pay check to pay check or you earn a juicy salary, tracking your money is a vital step to ensure financial prosperity in the long run.
Contrary to popular perception, budgeting is less about restricting what you spend money on, and more about understanding how much money you really have and where it goes.
When cards and digital payments were still not widely used, people had to sit down and try to figure out what they spent each day. Now, all you need to do is go into your pocket, open your bank app or wallet and check the transaction history. Lots of digital wallets these days include easy budgeting and tracking tools.
I Wish I Had…
Not long ago, I was still relying on my primary bank for almost anything I needed. Loans, credit cards, savings, etc. That’s just the way it used to work. Not for me, but for most of us.
Digitalization empowered start-ups to develop innovative services, often more attractive than the ones traditional banks have been able to offer. In light of those new services, people (me included) started to diversify… Investing? Abra, Nutmeg. Sending money abroad? Crypterium. Getting your salary fast? Chime, N26. To date, I have over a dozen bank and wallet apps installed on my phone.
Of course, banks are not ignoring this trend. They understand that becoming customer-centric is vital to ensure their survival in the digital era.
Global consultancy firm Strategy& (formerly Booz & Co.) describes customer-centric banks as those that keep a “holistic and continuous view of each customer’s evolving life-cycle needs as he or she moves through marriage, home ownership, parenthood, and other transforming life experiences.”
Banks with a customer-centric approach are less likely to push the same products to everyone, but rather adjust them to effectively target the needs of different clients. In other words, they partner with customers and help them solve their problems.
And it seems to work. According to a study by Collinson Group, 47% of middle-class US customers feel more loyal to banks that know who they are and treat them differently, while 49% expect banks to proactively offer services tailored to their specific needs.
Money management tools
Budgeting might be a necessary thing, but let’s face it: not everyone is good at it. Thankfully, technology is making it easy for all of us to manage money effortlessly.
In the US, you have services like Mint that allow you to connect all your credit cards, bank accounts and, in some cases, even retirement accounts to keep track of your finances from a single platform. Bill alerts, budget follow-up, credit score calculator, spending by category, budget suggestions — it’s smooth and done automatically.
With recent regulation — Payment Services Directive 2 (PSD2), Europe is also moving towards the implementation of “open banking” — where banks are required to share financial information with regulated businesses via an open API. In the UK, this has opened the doors to money tracking solutions such as Money Dashboard.
Innovative big banks, like HSBC, are already using open banking for retention of their own customers. HSBC UK customers can now connect their non-HSBC accounts to the bank’s mobile app and track all their spending.
But even with regulators building friendlier environments to support innovation, EY’s Open Banking Opportunity Index***** outlines financial data aggregators still have a long way to go in winning over customer trust — the key to their success.
Different ways to save money
People tend to conceive of savings as “pots”. The retirement pot, the vacation pot, the education pot. Some banks like Monzo now let you set different savings pots, so you can easily visualize the progress of your saving efforts.
If you wanted to start saving money before, you were responsible for actually putting aside the cash. That’s no longer the case. I am personally a big fan of auto-savings features. You can either set it to round up your expenses and “keep the change” for savings or ask the system to take a certain amount from your salary every month.
There is more. Abra, for example, has democratized investing in stocks by tokenizing shares and letting everyone purchase small amounts. This is truly transformational as access to these types of assets used to be out of reach for most people. You had to open a securities account and you needed a lot of money to do so.
Democratization of knowledge
Apart from the democratization of financial services, we’re also moving into the democratization of knowledge. While the Internet’s global penetration rate currently stands at 57%, meaning over 4 billion people still don’t have access to it, the number of internet users is growing consistently.
If I wanted to find out details on compound interest when I was in my 20s, I had to spend time on a slide-ruler or early calculator. Now I can access updated information in sites like Investopedia or ask my friends, using social media platforms.
Investments that fitted me
Investment is about your risk appetite and goals over time. How long you can afford to not have that money? If you need the money back in a year or two, then you’d naturally go for less risky alternatives. If time is not an issue and you’re willing to let that money run for ten years, without the need to touch it, then the range of investments available to you would be much wider.
Unlike the rigid and limited investment options of the past, today we have flexible solutions that allow us to withdraw funds whenever we need them and invest automatically in pre-packaged portfolios, without ever making a phone call to a broker.
It’s essential to understand your risk appetite through risk profiling beforehand to understand whether you have the mind-set and savings capacity to actually countenance losing money. In many countries, this is a mandatory process in any investment app or account opening.
The Bottom Line
What would my 20-year-old self think, then? He would be amazed about the choices and flexibility we now have in spending, saving and borrowing. The whole move from banks and ATMs, to cards and now digital apps, such as Crypterium, has been transformational.
How we are able to manage our money has changed immeasurably, although our different needs have not. As we move through our life stages, we experience similar financial needs at different times of our lives. Taking the time to understand our relationship to money is as important as having customer-centric organizations around ready to help us. Fortunately, thanks to digitalization, today we can not only spend less time on designing sustainable financial plans for ourselves, but we also have access to some of the best solutions through just a few taps. Cup of coffee, anyone?
Disclaimer: This article is intended to provide general information and shouldn’t be considered financial advice. Some services mentioned in this article might not be available in your region.