Millennials and Their Investing Habits
Millennials get a bad rap. They are conceded, soft, impatient, hard to work with, entitled, unfocused, and fickle. A lot of that criticism is well deserved. On the other side of the coin, millennials tend to be the most authentic, socially conscious, flexible, entrepreneurial, tech-savvy, and most educated generation in western history.
Despite negative stereotypes of millennials trading in their retirement for Venti lattes, a recent report from Fidelity Investments shows that 60% of millennials have already started putting away money for retirement. They just aren’t saving as much or investing as aggressively as past generations.
Every generation is shaped by their environment in their early years. Unfortunately, a lot of millennials have a bad taste in their mouth of investing from watching their parents lose a significant amount of money in the stock market during 2008 and 2009. The S&P 500 hit its lowest point of the crash on March 9th, 2009 when it closed at 676; a 57% drop from its highs in 2007. Many of this generation was at a very impressionable age, between 15 and 25. What most investors overlook is the fact that the market has more than quadrupled since then. The S&P 500 is at 2839 as of August 14, 2018.
Dr. Mariane Doyle has a Ph.D. in Educational Studies and believes there are a few theories to explain why millennials are hesitant to invest. Doyle is currently the Director of Career Technical and Adult Education for the William S. Hart Union High School District. Her focus is on preparing future generations of America for meaningful employment. According to Doyle, “Millennials do not have the depth of understanding as it relates to savings and investing. They are in the most debt of any generation because of their college educations, not because they have unwise spending habits. On the contrary, college loans aside, millennials may be the smartest generation regarding debt in many years.” Her opinion is that millennials don’t have the same long view of their financial future than their parents had. Hence why we see “…a flood of people easily sliding into the gig economy” that offers few guarantees but more flexibility. Doyle agreed that “This can translate into a financial disaster.”
Here are some ways that millennials can balance their flexible lifestyle goals and long-term investing.
Track your spending
It is hard to find money to save when you don’t know where the money is going in the first place. There are a lot of apps out there that will track every purchase/expenditure that you make. They even analyze the data, give you tips on how to improve your financial situation and let you know when you are spending more than normal or more than your monthly goal. One of the most popular apps is Mint. It is bank-level encrypted and will even give you a free credit score report every month.
There are a vast amount of charts and graphs available on the internet that show the magic of investing as early as possible because of compounding interest. Even if the amount is small, over the course of 30+ years, it will make a significant difference as it snowballs and grows. $100 now growing at 7% annually will grow to over $1,000 in 35 years.
Don’t shy away from a little bit of risk
As an advisor over multi-million dollar retirement plans, it is amazing to me to see how much money is invested in cash equivalents like money market funds. While you should only invest if you feel comfortable, if this money is for the future you can afford to ride the ups and downs of the market. Speak with a professional about the appropriate risk profile for you, but be aware that in order for your money to grow at a faster pace it needs to be invested in something that has some risk. We need to take risks in all aspects of life to grow and the same is true with money. As you take the appropriate amount of risk, it will be easier to hit your financial goals.
To Roth or not?
Many millennials starting out their careers are in a fairly low tax bracket. Putting money in a traditional IRA or 401(k) might not give a great tax benefit yet, so many should consider if putting money in a Roth IRA or Roth 401(k) makes more sense. Even though you don’t get the tax deduction, tax-free growth for the rest of your life is a colossal bonus. Plus, after the money has been in the Roth for over 5 years, you can take the principle out without tax penalties in case of an emergency situation.
If you don’t know how to analyze stocks or even mutual funds, a good potential alternative is to invest in index funds. These funds have very little investing costs and track different areas of the stock market. The average annualized total return for the S&P 500 index over the past 90 years is 9.8%. As mentioned before, you should find out what the appropriate risk allocation is for you, but if you are young, it may be wise to invest a larger portion of your money in the stock market. Compounding interest over time makes a huge difference to your portfolio later in life. Even a 1% addition to your annual return can make a difference of over a hundred thousand dollars in your retirement account 30 years later.
Invest in yourself
It is hard to cut back on expenses and set aside money to invest. Cars break down, homes need repairs, pets need to go to the vet and on and on. Life is expensive and unforeseen costs come at us left and right. For some, an easier way to save more money is to make more money. Whether you take advantage of the gig economy and freelance on the weekends or rent out your car through Turo, there are lots of ways to make some extra cash. When you do make extra money, don’t immediately go to Amazon prime and find what you can buy, but put at least half of it away into savings. Also, if your current employer has opportunities for growth, spend the time with your boss to find out how you can move up the ladder and get promotions. Spending a few more hours a week working now can make a significant difference in your income in 5-10 years.
Accumulate wealth now
Whether it is putting money away in an investment account, buying real estate that you can rent out, or building a business; find a way to start putting money into things that make money for you. One of Warren Buffet’s most known maxims is “If you don’t find a way to make money while you sleep, you will work until you die.” This may not be 100% accurate but the point is, you need to put your money in a position to work for you, not against you like paying interest on things that depreciate. Even if it’s small, invest your time and money into things that will grow in value over time. In the end, it will pay dividends.
Ultimately, there is no one size fits all solution. If there is anything that we have learned from society over the years is that everyone is unique. Everyone’s desires and goals are different. Someone’s investment style may be different than another’s. If you need to talk to a professional or someone that is successful with money, please do. The stigma of never talking about one’s financial situation is what leads people to make the same financial mistakes over and over again. The more we learn from other’s successes, the easier it is to find a way that will fit you and your goals.
James Schramm CERTIFIED FINANCIAL PLANNER™
27951 Smyth Dr. Suite 100
Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.
Opinions expressed in the article are those of the author and are not necessarily those of Raymond James. All opinions are of this date and are subject to change without notice. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index. Any examples are a hypothetical illustration and are not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. An index fund takes on the risk of the underlying index. It tries to replicate and, as a result, if the index goes down in value, the fund can lose value. Real estate investments can be subject to different and greater risks more than diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws, and interest rates all present potential risks to real estate investments. Money Market Funds: An investment in a money market fund is not insured by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
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