We’ve heard about the difficulties that Millenials face in today’s workforce. While each generation faces its own diversity, it seems that Millenials face many challenges that didn’t exist 20 years ago. Although the Great Recession was 10 years ago, a lot of Millenials graduated college just in time to land in the worst job market since the Great Depression. When you add the rising cost of college tuition and concerns over Social Security’s long term viability, it’s easy to see how some of today’s Millenials believe that they’ll never be able to retire.
In order to help address the unique financial planning needs of today’s Millenials, many financial advisors have tried to identify ‘sub-niches’ within the Millenial market. There are HENRY (High Earner, Not Rich Yet), MARG (Mother-Assisted Recent Grad), CHIP (Career-Focused, Have Income Potential), and DREW (Debt-Ridden, Emerging Wealth), just to name a few.
This article focuses on the DREWs. A recent article stated that 29% of DREWS have hired a financial planner. Of these different personalities, DREWS are the most likely to have complicated financial decisions, which require actual financial planning. However, because of their debt, DREWs probably are in the position of least being able to afford good financial advice. In fact, it is the DREWs that are least likely to be able to afford NOT obtaining sound financial advice.
What is a DREW?
According to research conducted by SEI, a practice management blog for financial advisors, DREW is a little more experienced than the other Millenial types. This means they’re more likely to be in their early to mid thirties, instead of their 20s. Because of their age, DREWs are earning more ($95,396) than MARG ($74,881) or CHIP ($80,916).
DREWs will have accumulated a lot more debt, but will have also saved or invested more of their money. As a result of their savings, a DREW’s net worth will also be slightly higher.
However, it also seems that DREWs face significantly more financial planning challenges than either MARG or CHIP, for several reasons:
- CHIPS appear to be at the point of making life & career milestone decisions. Marriage & having children are two obvious examples of significant life decisions. However, there are a number of career-related decisions that might also warrant consideration, depending on the DREW’s chosen occupation. All of these decisions have significant financial impacts.
- Paying down debt versus investing. DREWs are probably trying to get their arms around how to save for the future while aggressively tackling debt. But their biggest challenge is in trying to figure out if the decision they’re making is the right one.
- More complexity. By definition, MARGs probably have the simplest finances, and CHIPs are primarily focused on their careers. Although they might have financial planning needs down the road, neither group is probably interested in hiring someone to help them with their finances. Conversely, DREWs do have more complexity, but might be encountering obstacles in finding the right person to help them.
- I’m sorry, you don’t meet my minimums. How many times have you heard this? Usually, it’s something that a lot of perfectly good financial planning clients hear when they approach a firm. Even if the firm is willing to make an exception, all it takes is one look at the balance sheet to send them running. However, DREWs have what is known as ‘good debt,’ such as a reasonable mortgage, student loans for professional degrees, or loans to start their own business. All of these will help DREWS increase their lifetime earnings, which in turn increases their ability to create wealth over time. Ironically, this might actually make working with DREWs much more desirable in the long run than many of the clients that financial planners typically want to attract.
So what does a DREW need to understand about financial planning? While it’s unique to each person’s situation, here are five things each DREW should know.
1. It’s not all about the Millenials.
It’s easy to lump all HENRYs, CHIPs, and DREWs into the ‘Millenial’ category (most MARGs probably are actually Millenials). That way, Gen Xers & Boomers can dismiss the things they don’t like, while crying ‘Me Too!’ on some of the things we all have in common.
But being a DREW isn’t just a Millenial thing. For example, many doctors (or dentists, lawyers, and other professionals) end up as a DREW. They spend a lot of time paying off student loans, then end up taking on debt as they acquire or establish their own practice. Plenty of people in their 40s go back to college after raising a family, so they can re-enter the workforce and start focusing on retirement needs. There are also folks who, after spending their 20s and 30s having fun, are now focused on getting set for life after their career. They might have earned a lot of money, and seen most of it go right out the door.
2. Cash flow is just as important as your balance sheet.
While many DREWs focus on removing debt and adding to their savings, cash flow is so much more important. After all, if you don’t have control over your cash flow, you’ll spend a lot of time stressing out over your balance sheet. If, on the other hand, you’ve optimized your cash flow by reducing wasteful spending and becoming tax-efficient, you’ll be in a much stronger position to make those changes to your balance sheet. And you’ll have more options in doing so.
3. Not all debt is the same.
When you’re looking at the debt side of the ledger, it’s important to know that that there is ‘good debt’ and ‘bad debt.’ Some debt is obviously bad, such as credit card debt, consumer loans, and high-interest rate loans. Some debt is okay, like financing a car (assuming you got a good APR). And some debt could actually be considered good debt, such as a mortgage (on the right sized house, with the right amount of equity), student loans (assuming the education is directly supporting your career), or acquiring a business (like a doctor or dentist buying a practice).
Of course, each situation is different. There could be a perfectly reasonable explanation for using credit card debt (not too many). There are also plenty of loans for houses, educations, or businesses that don’t make financial sense. Some of them are just downright bad ideas.
Within your unique situation, there might be more than one correct approach. But a good financial planner can help you decide which debt to tackle first, and which debt you can pay off in a more deliberate manner. That way, you can properly get rid of ‘bad debt’ as soon as possible. When you’re left with only good debt, you can then figure out a plan that leverages the good debt so you can maximize your net worth.
4. There’s more to financial planning that just tackling debt and stashing money.
There’ SO much more. Here are a few of them:
Personal protection: Many people call this insurance. But insurance from what? Proper financial planning covers identifying the different types of risk in your life, discussing the options to address those risks, then figuring out the best plan to address them.
Estate planning: In layman’s terms, estate planning is simply documenting what you would like to happen to you and everything that is important to you in the event that you can no longer do anything about it. Everyone needs estate planning. It can be as simple has a will and proper beneficiary designations or it can be as involved as complex estate planning strategies designed to minimize estate tax impact. And everything in between.
Investments: Of course you’re going to save money. And your goal is to save a lot of it, invest it, and make it work for you over time. But where? And how? All that depends on your attitude towards investment risk, your investment goals, and how much time you have before you plan to use that money. And it’s worth spending a little time to make sure you get all those things right before you start putting money somewhere.
Tax planning: You can do all of these things correctly and still pay more taxes than you should. But why would you want to? Proper tax planning allows you to make sound financial planning decisions while being as tax-efficient as legally possible.
5. Proper financial planning is available. And important.
This is for all those people who feel let down by the firms who have $500,000 or $1 million investment minimums: You don’t need those firms any more than they need you. Don’t get caught up in the hype.
Just think of the people who ‘get in the door’ because they’re barely above the minimum. Many of those folks are probably underserved. In other words, they’re probably paying more than they should, for service that is less than what they deserve.
There are plenty of smart, competent financial planners who will work with folks who are making decent money and making sound decisions. And those planners are more than willing to help you create the path from being a DREW to financial independence.
Before any true financial planning can take place, you must first demonstrate the discipline to save enough money for an emergency fund. However, once you’ve done that, or if having enough cash has never been an issue for you, then it might be worthwhile to look at your entire financial situation. That way, you can rest assured that your money is working as hard as it can to support your best life!
Are you ready to take that next step? It’s as simple as scheduling a complimentary, 30-minute consultation with us. During that time, we can talk about your financial concerns and goals. We’ll also determine if working together is the right thing for you. Feel free to schedule that appointment!