Many individuals aim to work diligently, save money, and eventually retire early. However, a growing trend of soft saving is gaining ground among younger workers, challenging the conventional approach to financial planning.
With the changing of generations, there’s a noticeable shift in saving attitudes.
The younger generation is embracing a more relaxed approach compared to the frugal habits of previous generations.
In the past, older generations tended to be more strict, saving a lot in their present to have money for later in life.
On the other hand, Generation Z prefers a softer approach, enjoying life today without such strict savings disciplines.
Meanwhile, According to the Prosperity Index Study by Intuit, Gen Z is adopting the novel personal finance approach termed soft saving, which centers around favoring one’s lifestyle over pursuing aggressive saving objectives.
In this context, soft saving responds to financial concerns in the modern age, as noted in the report. This trend reflects a shift towards valuing life experiences over accumulating wealth.
What is Soft Saving?
Soft saving is a concept where a smaller portion of income is reserved for the future, allowing for more lavish spending in the present.
According to Liz Koehler, head of advisor engagement for BlackRock’s U.S. Wealth Advisory business, younger investors seek emotional connections with the brands and professionals they choose to engage with.
Younger investors often allocate their funds to causes aligning with their beliefs.
The current personal saving rates among Americans appear to align with the soft saving trend.
The decline in savings in 2023: Impact of pandemic rebound and inflation
As per the U.S. Bureau of Economic Analysis, Americans’ savings have declined in 2023.
In August, the personal saving rate, representing the percentage of disposable income set aside for savings, dropped to 3.9%.
It is a notable decrease from the 8.51% average observed in the past decade.
A contributing factor to the decline in personal savings is the economic rebound following the COVID-19 pandemic, as stated by Ryan Viktorin, vice president of financial consultant at Fidelity Investments.
Because Americans reduced their spending considerably during the pandemic in recent years, there’s a greater likelihood that people will increase their spending significantly now.
Furthermore, inflation adds to the challenge of covering expenses and saving for individuals.
Shifting priorities in modern finance and retirement
The decline in personal saving rates indicates a shift in financial goals among today’s workforce.
With the entry of younger individuals into the workforce, there comes a shift in financial priorities.
They are more inclined to strike a balance between traditional frugality and allocating some of their additional income to enjoy the present, as noted by Viktorin.
Retirement traditionally marks the grand finale for most workers. Nevertheless, an increasing number express concerns that they might be unable to retire.
According to a report from BlackRock in 2023, just 53% of workers believe they are making sufficient progress to retire with their desired lifestyle.
With soft saving, concerns about insufficient retirement income, fears related to market volatility, and the impact of high inflation were cited as key reasons for a lack of confidence among workers regarding their retirement.
Research indicates that nearly half of the working population either anticipates working beyond 65 or lacks retirement plans.
Interestingly, around 41% of Gen Z and 44% of millennials aged 27 to 42 are more inclined to engage in paid work during retirement.
These numbers surpass the figures for Gen X, at 31%, and Baby Boomers, at 21%, according to the Transamerica Center for Retirement Studies survey.
Meanwhile, Fidelity’s second-quarter retirement analysis revealed that millennials and Gen Z remain prominent participants in the 401(k) savings plan.
Notably, that is an American employer-offered retirement savings program with tax advantages for savers.
On what younger generation is keen to spend more?
While the younger generation may believe in soft saving and end up saving less, it doesn’t necessarily indicate that they are struggling financially.
It seems that Gen Z is maintaining a lifestyle within their means, and their increased spending and soft saving is primarily due to the rising costs of essential items rather than a preference for luxury.
Andy Reed, head of investor behavior at Vanguard, pointed out that while spending on things that bring happiness is valuable, individuals must address their immediate needs and remain aligned with their long-term financial objectives before indulging in discretionary spending.
The Intuit study revealed that millennials and Gen Z are more willing to invest in hobbies and make non-essential purchases when compared to Gen X and Baby Boomers.
Approximately 47% of millennials and 40% of Gen Z expressed the importance of having funds to pursue their passions or hobbies. In comparison, this sentiment was shared by only 32% of Gen X and 20% of Baby Boomers.
Experts noted that non-essential experiences like travel and entertainment are among the priorities for the younger generation.