A.

Factors that affect millennials’ saving habits

The first factor is the inefficient pensions system. According to the article, the current pension
system is now less generous than the previous system. It means that the responsible of increasing the
pension value are put on the saver. The article indicates that a 25 year olds need to save £800 a month
in 40 years in order to have good amount of income after retiring at 65 year olds. In order to save that
amount of money, millennials need to have a well-paid job which is quite difficult for many millennials.
Thus, millennials may prefer spending money on other short-term investment instead of saving in long-
term for such a low value reward.

The second factor that impact millennials is the high and expensive living cost. For instance, the
amount of cash which is required in order to buy a house in UK is now too expensive. Thus most of
millennials have no choice but to become “Generation Rent”. The article indicates that renting cost is
now accounting for 25% of income of most people who are under 30s. As a result, millennials need more
cash to spend on immediate problem such as living cost or buying a house to reduce renting bill.
Eventually these short-term spending will reduce the budget for saving.

The third factor that impact saving habits of millennials is the mindset of “living life in an acceptable
and fun way”. It means that millennials will spend their money to satisfy their needs and demand
increasing their comfortable lives. In addition, the article also indicates that the YOLO lifestyles of many
millennials make them prefer spending money on “experience” rather than owning and having tangible
asset. Thus, the more money that is spent on “experience” the less money will be saved.

B. YOLO mentality approach to spending affect the financial market

The term YOLO stands for “You Only Live Once”. It refers to the mentally spending approach that
put higher priority on spending than on saving. First of all, under the perfect condition, the amount of
saving will equal the amount of investment. Thus, the amount of saving will be transferred into
investment through financial market (directly) or financial intermediaries such as banks (indirectly).
However, the YOLO spending approach which does not prefer saving will eventually lower the amount
of investment in the economy. For instance, the amount that is not spent can be saved in bank or can be
used to purchase shares. Then companies and entrepreneurs or even individuals can borrow this
amount of money to make further investment. If the millennials spent all of their money, there would be
no money to be putted in banks. As a result, the capital for lending (loanable fund) will be shortage. The
result of the shortage of investment capital is the increase of interest rate leading to the decrease of
demand for investment or loanable fund. However, the spending approach of millennials can boost the
consumption of the market which increases the demand for good and service. The following is the
financial market model in relation to YOLO spending approach.
Figure 1 Financial Market Model

It has been explained above that the shortage of loanable fund due to the YOLO spending will
increase the interest rate. In the figure 1, it can be seen that the supply of fund and demand of fund
meet at the equilibrium point in which the willingness to rent at a price equal willingness to borrow at a
price. However, if the interest rate (r*) increase to higher interest rate which is 1, the supply of loanable
fund will increase to Q2 while the demand of loanable fund will be decrease to Q1. As a result there will
be gap between supply and demand for loanablefund.