Rising cost of living is eroding Gen Z's savings

According to Bank of America, Gen Z is about to become, at least statistically speaking, very wealthy – the only problem is that they are not allowed to save. A recent report shows that not only is this demographic group set to become the largest in the next ten years, reaching about 30% of the global population, but their income is expected to grow significantly. Within the next five years, Gen Z is projected to accumulate a global income of $36 trillion, with an expected increase to $74 trillion by 2040. To put it into perspective, in 2023, this figure was only $9 trillion. A promising figure but with profound implications: Gen Z’s consumption decisions will soon have the power to profoundly alter the economic landscape, especially considering that their preferences are shifting from the traditional economic model towards a more technology-driven and e-commerce-oriented economy. As the report indicates, in addition to rising incomes, Gen Z could experience the most significant growth in spending: by 2030, their global spending could reach $12.6 trillion, compared to $2.7 trillion in 2024, making them one of the generations that could most dramatically reshape economic, market, and social dynamics. Whether it’s dietary changes, reduced alcohol consumption, or new saving and housing habits, Generation Z will redefine the concept of the consumer in the United States.

Aggregated credit and debit card data from Bank of America show that Gen Z’s per-household spending growth has been above the population average, both for essential and discretionary expenses. In categories like entertainment and travel, Gen Z’s spending growth is particularly notable, with a 25.5% year-over-year increase and a 13.8% increase on a six-month moving average in February. That same month, their spending on non-discretionary items, such as rent and utilities, was higher than the population average. Yet, 52% of Gen Z respondents stated that they do not earn enough to maintain their desired lifestyle and that the high cost of living is one of their biggest financial challenges. The survey also found that 32% of young people feel they are falling behind compared to their parents at the same age in achieving financial goals. And while Gen Z is aware of the importance of saving, many are unable to set aside as much as they would like. Internal data from Bank of America show that, on average, Gen Z does not have enough savings to cover a month’s expenses. In February, their spending-to-savings ratio was 1.93, meaning they were spending almost twice what they had in savings. This figure has increased since 2023 and remains well above that of other generations.

At least in America, among young people aged 18 to 21 who were no longer in high school in 2022, 57% of Gen Z was enrolled in a two- or four-year college. By comparison, in 2003, only 52% of Millennials and in 1987 only 43% of Generation X were enrolled in college at the same age. This indicates that Gen Z is attaining higher levels of education than previous generations, which could lead to higher employment rates and higher average salaries. According to Bank of America deposit data, wage growth for Generation Z was nearly 8% year-over-year in February, the highest among all generations and about double the general average—growth driven by Gen Z entering the workforce for the first time. The problem is that there are significant challenges in finding and keeping a job. In February, the unemployment rate for new workforce entrants increased by over 9% year-over-year, peaking at 29.4% year-over-year in October 2023. This suggests that Gen Z is facing an increasingly difficult job market. Additionally, the number of Gen Z households receiving unemployment benefits increased by nearly 32% year-over-year in February, surpassing the 2024 average, according to Bank of America data. Although absolute levels remain lower than those of other generations, the growth indicates that more young people are struggling to maintain employment. Moreover, the Bureau of Labor Statistics’ March employment report recorded an increase in the underemployment rate, suggesting that many young people are accepting any available job in a market characterized by low job mobility.

But there are signs of improvement: the median balance of Gen Z deposits remains above the inflation rate, even though it starts from a much lower level than previous generations. That is, even though Gen Z’s deposits are generally lower than those of older generations, they are still growing faster than the inflation rate, which measures the general increase in prices over time. In other words, the money Gen Z members have today may be able to buy more goods and services than it might in the future, as inflation is not eroding their bank balance at the usual pace. To cope with rising expenses, two-thirds of surveyed Gen Z members stated they have adjusted their lifestyle, cutting back on dining out and skipping events with friends. In the short term, the economic impact of these choices will be limited, as young people still represent a relatively small share of total consumer spending in the United States, about less than 20%. But the situation could change as a massive wealth transfer is expected, with assets passing from Baby Boomers to younger generations. This means that Gen Z and Millennials will have an increasingly significant influence on spending and saving decisions.