Personal Finance

Why some call it phantom wealth

Published

2 days ago

January 27, 2025

How Gen Z is beating Millennials in the homeownership race

Millennials have come a long way since their days of being called lazy or entitled. Despite reaching key milestones later than their parents once did, they are now wealthier than previous generations were at their age.

“Younger families in the U.S. made remarkable gains,” according to an analysis of 2022 data by the St. Louis Federal Reserve.

Collectively, millennials are now worth about $15.95 trillion, up from $3.94 trillion five years earlier, according to Federal Reserve data.

Still, very few millennials would consider themselves wealthy. The disconnect between being rich on paper and feeling well off has been referred to as “phantom wealth.”

For example, gains in the value of a home or a retirement plan can feel like phantom wealth because they are illiquid and have no bearing on day-to-day cash flow.

Boosted by a strong jobs market and rising wages, many in this age group have purchased homes and benefited from soaring home values. To that point, the St. Louis Fed report found between 2019 and 2022, home prices jumped 44%.

Largely driven by real estate gains, the “median wealth of these younger people more than quadrupled” during this three-year period, the report said.

However, homeownership does not offer the same sort of safety cushion other investments do, noted Michael Liersch, head of advice and planning at Wells Fargo.

“Unless you are willing to downsize, you are really not going to monetize the increase in that asset,” said Liersch, especially in the case of a primary residence. “Millennials, in particular, haven’t been able to use that wealth.”

Millennials have ‘phantom wealth’

“Phantom wealth is a nonsensical term: assets either exist or they don’t,” said Brett House, an economics professor at Columbia Business School. However, there is a very real phenomenon at work.

As it turns out, “millennials experienced a sharp swing in their relative standing,” the St. Louis Fed report found.

The median wealth of older millennials, between the ages of 36 and 45, was 37% above expectations. The wealth of younger millennials and older Gen Zers, or those aged 26 to 35, exceeded expectations by 39%.

Compared to other generations, millennials are also more likely to say their income went up over the last few months and that they expect their earnings potential to increase again in the year ahead, according to another report by TransUnion.

But even as households became wealthier, inflation and instability have left more people in the bucket of so-called HENRYs — “high earners, not rich yet,” House said.

And “the ‘HENRY’ phenomenon isn’t limited to millennials or Gen Z,” he added.

“It’s harder for every generation to feel financially comfortable when the management of so much risk related to employment, healthcare, retirement pensions, insurance, and other components of economic well-being has been shifted to individuals during a period of rapidly rising prices,” House said.

‘There is so much more to achieve’

Many millennials also say it’s harder today to make it on their own than it was for their parents when they were starting out.

They have higher student loan balances, bigger mortgages and car payments and more expensive childcare costs, explained Sophia Bera Daigle, CEO and founder of Gen Y Planning, a financial planning firm for millennials.

“Cash flow has been tight,” she said.

That makes it more difficult to set extra money aside or make long-term plans, said Bera Daigle, a certified financial planner and a member of CNBC’s Advisor Council, “While they are making significant progress on reaching some financial goals, it still feels like there is so much more to achieve.”

However, feeling financially secure is often less about how much money you have and more about the ability to spend less than you make, experts say.

In part, higher prices have fostered the feeling of being overextended, according to CFP Kamila Elliott, co-founder and CEO of Collective Wealth Partners.

Elliott, who is also on CNBC’s FA Council, said clients often ask “Where is my money going?”

“If you feel like a lot of fixed expenses are going up, it may mean you need to cut back on the fun things,” she advised, such as eating out or taking a vacation.

“It’s going to take a little bit of an offset to have more money at the end of the month,” Elliott said.

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Personal Finance

Social Security Fairness Act beneficiaries may face lengthy wait

Published

9 hours ago

January 28, 2025

Business Finance News

More than 3.2 million people will see increased Social Security benefits, under a new law.

However, individuals who are affected may have to wait more than a year before they see the extra money that’s due to them from the Social Security Fairness Act, the Social Security Administration said in an update on its website.

“Though SSA is helping some affected beneficiaries now, under SSA’s current budget, SSA expects that it could take more than one year to adjust benefits and pay all retroactive benefits,” the agency states.

The Social Security Fairness Act eliminates two provisions — known as the Windfall Elimination Provision and Government Pension Offset — that previously reduced Social Security benefits for certain beneficiaries who also had pension income provided from employment where they did not contribute Social Security payroll taxes.

Those provisions reduced benefits for certain workers including state teachers, firefighters and police officers; federal employees who are covered by the Civil Service Retirement System; and individuals who worked under a foreign social security system.

The law affects benefits paid after December 2023. Consequently, affected beneficiaries will receive increases to their monthly benefit checks, as well as retroactive lump sum payments for benefits payable for January 2024 and after.

The benefit increases “may vary greatly,” depending on an individual’s type of Social Security benefits and the amount of pension income they receive, according to the Social Security Administration.

“Some people’s benefits will increase very little while others may be eligible for over $1,000 more each month,” the agency states.

The Social Security Administration said it cannot yet provide an estimated timeline for when the benefit adjustments will happen.

In the meantime, the agency is advising beneficiaries to update their mailing address and bank direct deposit information, if necessary. In addition, noncovered pension recipients may now want to apply for benefits, if they are newly eligible following the enacted changes.

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Personal Finance

Student loans not affected by federal aid freeze

Published

10 hours ago

January 28, 2025

Business Finance News

'Tremendous amount' of instability under new Trump administration, says CIO

The White House is pausing federal grants and loans, according to a memo sent out Monday night, but the freeze will not impact student loans or financial aid for college.

The freeze, which could affect billions of dollars in aid, noted an exception for Social Security and Medicare. The pause “does not include assistance provided directly to individuals,” according to the memo.

The pause gives the White House time to review government funding for causes that don’t fit with President Donald Trump‘s policy agenda, according to Matthew J. Vaeth, acting director of the White House Office of Management and Budget.

The memo specifically cited “financial assistance for foreign aid, non-governmental organizations, DEI, woke gender ideology, and the green new deal.”

What student aid may be affected

The U.S. Department of Education said the freeze on federal aid will not affect Federal Pell Grants and student loans. It also has no bearing on the Free Application for Federal Student Aid for the upcoming year.

“The temporary pause does not impact Title I, IDEA, or other formula grants, nor does it apply to Federal Pell Grants and Direct Loans under Title IV [of the Higher Education Act],” Education Department spokesperson Madi Biedermann said in a statement.

In addition to the federal financial aid programs that fall under Title IV, Title I provides financial assistance to school districts with children from low-income families. The Individuals with Disabilities Education Act, or IDEA, provides funding for students with disabilities.

The funding pause “only applies to discretionary grants at the Department of Education,” Biedermann said. “These will be reviewed by Department leadership for alignment with Trump Administration priorities.”

The pause could affect federal work-study programs and the Federal Supplemental Educational Opportunity Grant, which are provided in bulk to colleges to provide to students, according to higher education expert Mark Kantrowitz.

However, many colleges have already drawn down their funds for the spring term, so this might not impact even that aid, he said. It may still affect grants to researchers, which often include funding for graduate research assistantships, he added.

Why the freeze caused confusion

“While the memo says the funding pause does not include assistance ‘provided directly to individuals,’ it does not clarify whether that includes money sent first to institutions, states or organizations and then provided to students,” said Karen McCarthy, vice president of public policy and federal relations at the National Association of Student Financial Aid Administrators.

Most federal financial aid programs are considered Title IV funds “labeled for individual students,” and so would not be impacted by the pause, McCarthy said. But all other aid outside of Title IV is unclear at this time, she said: “We are also researching the impact on campus-based aid programs since they are funded differently.”

“When you have programs that are serving 20 million students, there are a lot of questions, understandably,” said Jonathan Riskind, a vice president at the American Council on Education. “It is really, really damaging for students and institutions to have this level of uncertainty.”

The American Council on Education’s president, Ted Mitchell, called on the Trump administration to rescind the memo.

“This is bad public policy, and it will have a direct impact on the funds that support students and research,” he said. “The longer this goes on, the greater the damage will be.”

Personal Finance

Why you may be getting ‘shortchanged’ on CD interest rates, researcher says

Published

12 hours ago

January 28, 2025

Business Finance News

Boonchai Wedmakawand | Moment | Getty Images

You may be leaving money on the table when it comes to certificates of deposit, some research suggests.

CDs have a set term, ranging from a few months to five or more years. Upon maturity, banks return the depositor’s principal plus interest.

Consumers who want their money early must generally pay a penalty, losing out on months of interest. However, paying that withdrawal penalty may be worthwhile for many savers who adopt the right strategy.

That’s what is suggested in a recent research paper from Matthias Fleckenstein, associate professor of finance at University of Delaware, and Francis Longstaff, finance professor at the University of California, Los Angeles.

Rather than pick a short-term CD, consumers often get a higher return by choosing a long-term CD and paying a penalty to pull money out early, they found.

Consumers who are unaware of the strategy may get “shortchanged” by banks, Fleckenstein told CNBC.

‘The rule rather than the exception’

Here’s an example: If an investor puts $1 in a five-year CD with a 5% interest rate and cashes it out after one year with a penalty equivalent to six months of interest, they would receive about $1.03, which is slightly more than the $1.01 they would get from a one-year CD with a 1% interest rate, despite the penalty incurred for early withdrawal.

Banks frequently price CDs this way, Fleckenstein and Longstaff wrote in their paper, published in October in the National Bureau of Economic Research.

The researchers examined weekly CD rates offered by 16,891 banks and branches — ranging from small community banks to big nationwide institutions — from January 2001 to June 2023. Rates were for accounts up to $100,000.

About 52% of CDs offered during that period had such “inconsistencies” in pricing when comparing a given term against a longer-term CD cashed in early, they found.

“It’s the rule rather than the exception,” Fleckenstein said.

“There are banks that do this all the time,” he said, and “there are some that don’t do this at all.”

At banks where this happens, the difference in returns “is not tiny,” Fleckenstein said. In fact, the pricing inconsistency is about 23 basis points, on average, over the roughly two decades they assessed, he said.

Given that disparity, the average investor who invested $50,000 could have gotten an extra $115 of interest by picking a longer-term CD and cashing it in early, their research suggests.

The average size of that pricing difference rose as interest rates began to increase during the Covid-19 pandemic, Fleckenstein said.

CDs often for ‘safety and liquidity’

Households that save in CDs are generally looking for “safety and some liquidity” for a chunk of their assets, said Winnie Sun, co-founder of Irvine, California-based Sun Group Wealth Partners and a member of CNBC’s Financial Advisor Council.

The typical CD buyer has a goal in mind, like saving for a home down payment, and wants to earn a modest interest rate without subjecting their money to much risk, Sun said.

About 6.5% of households held assets in CDs as of 2022, with an average value of about $99,000, according to the most recent Survey of Consumer Finances.

Like any investment, there are pros and cons to CDs.

For example, unlike other relative safe havens like high-yield savings accounts or money market funds, CDs offer a guaranteed return over a set period with no chance of market-based losses. In exchange, however, CDs offer less liquid access to your cash than a savings account and lower long-term returns than the stock market.

“Shop around for the best CD rate across banks, but also look within banks at whether it actually may pay off to accept a longer term but pay an early withdrawal penalty,” Fleckenstein recommended, based on his research findings.

The option may not be as prolific in the current market environment, though.

Long-term CDs typically pay a higher interest rate than shorter-term ones, Sun said. But average rates for one-year CDs are currently higher than those for five-year CDs: 1.7% versus 1.4%, respectively, according to Bankrate data as of Jan. 20.

Households can pursue other CD strategies, Sun said.

For example, instead of putting all savings into a long-term CD, consumers might put a chunk of their money into a long-term CD and with the remaining funds build a “ladder” of shorter-term CDs that mature more quickly. They can then buy more CDs if they’d like once the shorter-term ones come due.