Rachel Rochelle, 24, checks her mail twice a day, waiting for her tax refund. She is expecting just over $2,000 from Uncle Sam, and she knows exactly what she’s going to do with it. She is going to put it into her savings account.
“I prefer to have a solid sum of money for a rainy day,” Rochelle said. “I’ve seen fortunes come and go; I’ve seen families moving from penthouses to shelters.”
Rochelle, who has been saving her tax refunds for five years, ever since she started working for a small investment banking company in New York, is typical of many young people who say they have learned some hard lessons from the recent financial crisis, and are determined to be more tightfisted with their cash.
Generation Y – young Americans who used to be considered materialistic and absorbed with consumption – are learning how to be happy with less. Nearly two-thirds of Americans in their twenties plan to save their tax refunds this year, according to a survey by TD Ameritrade Inc. By comparison, only 36 percent of adults in their late thirties say they will do the same.
The economic collapse of 2008- 2009 has uprooted the spending habits of young Americans, prompting them to save more and spend less for a couple of decades ahead. Behind this shift are both psychological and financial reasons: having witnessed a dramatic economic recession in their formative years, Generation Y, also known as Millennials, are getting used to the fact that the world they thought they knew shattered.
One reason young people start to save instead of spending is that they doubt they will get any help from the government when they retire, said Carrie Braxdale, managing director at TD Ameritrade Inc.
“This generation is going to have some unique challenges – the days pensions are gone, the days Social Security is gone,” she said. “These people are prepared for the worst,” Braxdale added.
“Those folks in their fifties are used to the idea that it’s OK to spend more than you can afford, and buy houses, fancy cars, nice clothes and so on and so on,” said Liz Olstein, a psychologist specializing in the behavior of people under stress.
“Generation Y kids better forget what kind of lives their parents used to live and get used to the idea that they won’t be able to afford things that were common in their parents’ pre-crisis lives,” Olstein said.
Many young people apparently have been able to abandon their parents’ values quickly. In “Who Suffers During Recessions?,” a study of the effect of the financial crises of the 1980s and the 2000s, Hilary Hoynes, Douglas Miller and Jessamyn Schaller concluded that even a year of severe economic downturn changes young people’s habits and attitudes.
Millennials come of age being the country’s most stressed generation, according to a study by the American Psychological Association. When asked to rate the level of stress from 0 to 10, young Americans that took part in a study averaged with 5.4, while their parents got 4.7.
A growing body of surveys confirms that the psychology of entire demographics is determined by psychological landscape of the habitat in which they spent their formative years. The pressure on Generation Y echoes that on the Great Depression generation, known for reusing tea bags and staying thrifty throughout their lives.
“The new habit is most likely to stick with them forever,” Olstein said.
For many young Americans, the tax refund is the largest lump sum of money they receive during a year. Depositing the money in their savings accounts is a sign of their commitment – sometimes toward that vague rainy day, sometimes toward a life-changing goal.
Not all young Americans who said they would save the money will put it in the bank. With dim prospects for employment and tight budgets, some Millennials will give up on their commitments and rush to the malls.
“While they may make plans, once the money is there, these plans go out the window,” said Contessa Porter, also known as Dee Porter, a 27-year-old DJ at Z107.9, a hip-hop radio station in Cleveland, Ohio, and producer of weekly sketch episodes.
Her series, “The Income Tax Effect,” released amid the climax of the tax season, shows two young men who vowed to save their tax refunds and ended up buying a car and eating out.
Porter said she knew the reason behind such a rapid change of plans.
“It’s the freedom of knowing you can buy things you couldn’t afford yesterday,” Porter said.
Porter herself has come a long way from using the tax refund to pay her phone bills to putting it into her savings account.
“Now that I have more financial freedom than I ever had, I am very smart with spending,” she said, “because I know what it’s like not to have the money.”