Gen Y-ers got the message from recession

Like many of us, Ashley Frerich of Marshall, Minn., scaled back this Christmas, setting a dollar limit for presents and buying everything on sale. But several studies have shown this super-sized recession will affect young people long after the holiday season fades and the new year begins.

Four in 10 workers in their twenties and thirties are more conservative because of the recession, a recent study from Fidelity Investments found. In a paper published last year, Stanford Prof. Stefan Nagel and University of California, Berkeley, Prof. Ulrike Malmendier explained that the economic environments people experience in early adulthood influences their lifelong investing behaviors. They found Generation Y will likely invest less in stocks and take fewer financial risks because they experienced a major recession as young adults.

In the past, 20-somethings were the group most likely to be investing 100 percent in stocks because they're young and their time horizon is long. I'm sure some are still invested this way. But one big, fat stock market downturn later, and young people are singing a different tune, even though the market has rebounded nicely.

Frerich, 24, acknowledges that her money is earning little interest in a bank savings account, but "that's my life savings right now and to kind of give that up and put it in someone else's hands is a little scary," she said. The stock market doesn't have much appeal to Matt Carlson, 24, of Stillwater, either. "I've stayed away," he said, partly because he's still in school, partly because "it's kind of a big risk ... no one knows what's going to happen." His friend Eric Blythe, 23, started investing as a freshman in college. Blythe watched the value of his mutual funds halve last spring. The experience "made me more aware that the stock market isn't always going to be up," he said.

The lousy job market contributes to this more-conservative mind-set.

Frerich is working at J. Crew despite having a master's degree. She is considering a Roth IRA, a retirement account that allows you greater access to your money than a traditional IRA or retirement plan from work. "I could take it out if something happens or I lost a job," she said. She also said that after reading about "all those crazy schemes" from Bernie Madoff to derivatives, she's willing to have lower returns. "I would rather be able to back out and take my money and walk than be real high-risk," she said.

But what investors young and old tend to forget is that there are plenty of financial risks beyond what can be lost in the stock market.

Brian Wagenbach, Minneapolis branch manager for the brokerage Charles Schwab, tells young people to fixate on a percentage, not a dollar amount. It may not seem worth the trouble of saving 10 to 15 percent of a starter salary, but he reminds them that the dollar amount will grow with every pay raise. Plus they'll never get used to spending that portion of their paycheck and thus will never miss it.

Risk of inflation eating your savings. Risk exists outside the stock market. Put your money in cash for three decades, "and you're losing a significant amount of purchasing power," Wagenbach said.

Risk of depleting the money before retirement. More than one-third (35 percent) of Generation Y cashed out their retirement plans when they changed jobs, the Fidelity survey found. The majority did so because they needed the money to survive the job loss or make a major purchase. Still, that's a major no-no to be avoided if at all possible. "Go into it with the mind-set that those dollars are untouchable and have the discipline to not tap into those for emergencies," Wagenbach said.

Risk of taking on too much debt. Carlson is heading straight to graduate school for school counseling. Frerich plans to enroll for a doctorate in audiology come fall. "Right now it's really hard to find good, stable employment for people our age so I figured it's a good time just to go back now and work on my degree," Frerich said. She doesn't have credit card debt, but says education debt for her generation is "a given."

Student loans have long been considered "good debt." But education debt can be costly and unmanageable, and isn't dischargeable in bankruptcy in most instances. The Fidelity survey found that one in five respondents figure they'll never be free of credit card debt. I hope that a survey down the road doesn't find the same about student loans.

Brad Kimler, executive vice president of Fidelity Consulting Services, also points out that most workers in this generation will face the dual challenges of no employer-funded pension plan and having to pay for a higher share of their own health care costs, which takes a bite out of the amount available for retirement. No easy solutions here; save early, spend less, remember that your health is a valuable asset.

Yes, there are plenty of risks. But you know what they say about clouds and silver linings, right?

"I have never seen a group so quickly rethink different strategies in their life," Jenkin said. His clients are rethinking house size, the amount of debt they carry and how they spend their paycheck. "The good news is people have finally realized that material possessions aren't everything," he said. "Wealth is your personal security."