Why Financial Literacy is Important for Millennials and Gen Z?

Millennials and Generation Z live in a fast-paced era, with technology that makes their lives easier. However, this convenience also brings its own financial challenges. Therefore, a comprehensive understanding of financial literacy is crucial for millennials and Gen Z.

Why is financial literacy important for millennials and Gen Z?

According to the Financial Services Authority (OJK), financial literacy refers to the knowledge, skills, and confidence necessary to improve financial decision-making and management in order to maintain well-being. Adequate financial literacy helps you feel secure and capable of handling unexpected expenses.

For your information, millennials and Gen Z are the age groups with the highest financial literacy and inclusion rates, according to the 2024 National Survey on Financial Literacy and Inclusion conducted by OJK. Their financial literacy levels stand at 74.82% and 70.19%, respectively. These figures exceed the set target of 70%.

Despite their high literacy rates, financial education for young people should not be overlooked. So, why is financial literacy important?

1. Supporting life in a productive and dynamic age

Financial education for young people is crucial, as millennials and Gen Z are already in their productive years.

Additionally, these generations are living in an era where everything moves quickly and is supported by advanced technology. For this reason, the increasingly dynamic nature of life must be accompanied by good financial literacy.

2. Reducing prolonged financial burdens

Without strong financial literacy, millennials and Gen Z may face financial threats, potentially endangering the financial stability of entire families.

Lacking a solid foundation in financial education, millennials and Gen Z are vulnerable to high-interest loans and poor decision-making, which can lead to long-term financial burdens, sometimes lasting a lifetime.

3. Helping to access a better quality of life

Financial literacy enables millennials and Gen Z to accumulate assets. This is important to ensure a sense of security and access to higher education.

Without financial knowledge, it becomes difficult to make the right decisions, leading to illogical spending and an increased risk of debt.

Investing in the financial literacy of Gen Z and millennials is vital to bridging the gap toward greater opportunities. By doing so, you can secure a financially stable future.

4. Building responsible spending habits

Financial literacy for Gen Z and millennials is essential to allocate budgets and distinguish between needs and wants. The goal is to help make wiser financial decisions when considering a purchase.

Without a clear budget, you may end up spending more than planned and struggle to save money for goals such as vacations or work-related investments.

5. Enhancing financial security

Through financial literacy, millennials and Gen Z will learn how to build wealth and achieve long-term financial security. This can be done through investments, starting side businesses, or saving for retirement.

Financial literacy is crucial for long-term financial planning, reducing concerns about future financial stability.

What are the common financial challenges faced by millennials and Gen Z?

Here are some financial issues commonly encountered by those born between 1981–1996 (millennials) and 1997–2012 (Gen Z):

1. Caught in online loan traps

Online loans (pinjol) can be lifesavers during emergencies, but they can also pose significant financial risks for young people. These generations are particularly susceptible to falling into debt through online loans for consumption needs.

This situation is exacerbated by the "Fear of Missing Out" (FOMO) and "You Only Live Once" (YOLO) mindsets, where people take loans to keep up with trends. They may continue using loans to fulfill these temporary desires.

As a result, financial literacy for millennials and Gen Z can fall apart due to poor decision-making.

2. Minimal savings

Poor financial literacy among Gen Z and millennials is often compounded by low savings levels. This is largely due to a consumerist lifestyle.

Living a consumer-driven life often leads these generations to make frequent purchases for temporary comfort, leaving little to no money saved.

This lack of savings further disrupts financial planning for millennials, leaving them living paycheck to paycheck without an emergency fund for unexpected expenses.

3. Becoming the "sandwich generation"

One common financial challenge faced by Gen Z and millennials is becoming part of the "sandwich generation." This term refers to individuals who bear financial responsibility for their parents and siblings from different generations.

This situation arises due to a lack of financial literacy and a decline in parental productivity. As their parents' income decreases, they fail to set aside savings for retirement.

To support their parents, millennials and Gen Z must assume this financial burden, significantly increasing their own expenses.

4. Rising cost of living

Another challenge related to financial literacy for millennials and Gen Z is the rising cost of living, especially in urban areas. Rental costs, basic necessities, transportation, and healthcare expenses are increasing, while wage growth is not keeping pace.

Several factors contribute to the rising cost of living, including government policies, climate change, and the pandemic. As demand rises and the availability of goods and services remains limited, managing finances becomes more difficult.

If income does not keep up with rising costs, millennials and Gen Z will struggle to implement sound financial literacy practices.

5. Impulsive spending

Technology has indeed made many things easier, including accessing financial services and shopping. However, this convenience can be a double-edged sword for financial literacy among millennials and Gen Z.

It becomes easier to make purchases, often driven by temporary desires rather than actual needs.

Modern technology heavily promotes consumer spending through interactive advertisements, making you more inclined to shop for things you don’t necessarily need.

How millennials and Gen Z can manage their finances

Financial literacy for Gen Z and millennials can be enhanced by understanding how to manage finances effectively. Here are some tips that align with their lifestyle:

1. Set clear financial goals and plans

Having clear financial goals and plans allows you to consider spending more wisely. This way, you can allocate your money according to your needs.

It’s recommended to use the 50:30:20 method for budgeting: allocate 50% of your income for living expenses, 30% for savings or investments, and 20% for discretionary spending.

2. Regularly check your account balance

One essential aspect of financial literacy for millennials and Gen Z is knowing how much money is left in your account. After receiving your paycheck and managing your income, you can regularly check your balance through bank statements or mobile banking.

Monitoring your account balance helps you remain cautious about spending and ensures that your transactions are necessary.

3. Avoid borrowing unless absolutely necessary

Many financial institutions now offer installment plans or "buy now, pay later" schemes that make it easy to purchase goods. However, this convenience can increase your financial burden since you will be required to make regular payments, often with high interest.

This essentially means you are borrowing money, and you must repay it with interest, which could reduce the amount you could otherwise save. Using such schemes for short-term consumption is not a wise debt management strategy.

4. Set aside funds for emergencies and savings

An important tip for managing finances is to allocate funds for emergency savings. Ideally, an emergency fund should equal 3-6 months of your salary if you are single, or 6-12 months if you have dependents.

As mentioned earlier, your savings should account for 20% of your total income.

5. Embrace a frugal lifestyle

Frugal living involves being economical and spending only on necessary consumption. This lifestyle is perfect for improving financial literacy for millennials and Gen Z.

Since these generations are relatively early in their careers, a minimalist approach to living can help manage overall finances. You can save for an emergency fund, set aside money for your goals, and focus on long-term financial security.

Frugal living does not mean being stingy with yourself but rather spending money consciously and making well-considered decisions. This lifestyle helps you remain focused on long-term financial goals.

Financial literacy is essential for everyone, including millennials and Gen Z, especially as these generations enter their productive years and face challenging global economic conditions.

To reduce financial burdens, start enhancing your personal financial management education. There are various platforms and content that provide financial tips for Gen Z and millennials.

Make sure the content you follow is realistic and easy to implement consistently. Remember, financial literacy isn’t just about organizing cash flow, but also building habits and awareness to manage and make wise financial decisions.