Ready for some good news about money and Millennials for once? Me too! Here it is: we are doing an awesome job saving money.
Recent surveys have shown that Gen Y is the most likely age group to have five months’ worth of expenses saved up. Our generation is also interested in being frugal, shopping smart, and putting our money where our values are (rather than where a consumerism-driven society says we should).
Our front-row seat to the Great Recession allowed us to see the importance of financially preparing for the future — and living beneath our means.
That’s the good news. Which means, yes, there is bad news. We’re creating our own uphill battle because of the way we keep all that savings: it’s all in cash.
It’s awesome that Gen Y is concerned about their finances and is making an effort to save rather than spend. But we need to get real.
Keeping all your cash in savings won’t be enough. Millennials need to start taking their money out of the mattress so it can do work for us.
Why Isn’t Keeping Cash Good Enough?
Let’s get one thing straight: I’m not saying cash savings funds are “bad.” Not even close!
We do need a certain amount of our savings readily available in cash. At the very least, we need an emergency fund to help us handle unexpected expenses.
A rainy day fund can help you pay for things that might otherwise wreck your budget. Without enough cash on hand, a financial emergency may push you into debt.
And you may want to keep separate funds for different savings goals. Maybe you want to save up for a round-the-world trip next year. Or you’re working on establishing a down payment for a home you want to buy two years from now.
In either case, keeping your cash in a standard savings account is good enough. It also makes good financial sense. We’re talking about money you either A. plan to utilize within three to five years or B. need easy, fast access to in case an unexpected expense tries to ruin your day.
The real problem occurs when you try to keep all your cash in a savings account down at your bank or credit union.
Why? Because cash savings simply cannot earn enough interest to help you establish and grow real wealth. Even savings vehicles like CDs or money market accounts don’t provide you with a way to earn enough via interest.
The only way to earn enough money to be financial secure and even financially independent is to invest your money in the market.
Millennials, You Create Wealth When You Quit Keeping Money in the Mattress
Remember that front-row seat to the Great Recession I was talking about? While that’s shown us the importance of learning about finances and doing more with our money than accumulating stuff to impress people we don’t even care about, it’s also left Millennials gun-shy when it comes to investing.
Much like people shied away from banks and markets after the Great Depression, today’s 20 and 30 year olds are avoiding moving money out of cash savings and into stocks, bonds, and other assets because they’re scared of losing it all.
After all, who wants to willingly throw money into a system that has shown it’s capable of losing value overnight? A system where every move you make is a risk and there’s no guarantee you won’t lose everything — much less earn anything in return?
But it’s really, really not good that Millennials are wary of making investments with their cash. The only way for us to create wealth is by taking our money out of the mattress and putting it into the markets instead.
Here’s the thing: we literally cannot afford to think this way. We can’t let one incident, no matter how dramatic it was, to encourage us to ignore all the other information we know.
Consider, for example, the fact that if we leave our money in the mattress, so to speak, the value of that money will be eroded by inflation. In other words, if you leave your money in cash where it’s earning 1% of interest or less in a savings account, the rate of inflation will outpace the rate of interest earned. And that means you’re money will be worth less than it was the day you earned it and stuck it in the bank.
It’s hard enough for you to work for your money and find enough each money to set aside in savings, right? While all investments carry risk, leaving your money to its own devices down at the bank is just as much of a risk — and it fact, it might be a bigger one than investing in the market if you consider the historic return of the stock market has been 10%.
So you could either earn an average of 10% on your money by investing it. Or you could let it sit collecting dust and watch it lose value in a place you thought it was completely safe from risk.
Investing is the only way to efficiently put your money to work for you. Because that’s just it: when it’s invested, it’s not collecting dust. Oh no. Those dolla dolla bills are gettin’ busy, y’all.
Allow Your Money to Get A Little Frisky
That’s right. Let your money act like bunnies and multiply!
(Was that totally weird? Maybe, but if you want, I made it so it’s easy to be weird with me and tweet it out.)
Weird or not, it’s an fairly accurate analogy. You see, money, when invested wisely, can earn a return. That return is then added to your principle, or the money you contributed to your investment, and then it starts earning its own return.
Can I get an amen for the power of compound interest?
That may be the simplest way to put it in words, but that’s not the best way to illustrate it. Take the example of a penny doubled every day for a month will total ten million dollars at the end of that month to better underline the point being made here.
Thing is, the only way to allow your money to earn enough to grow exponentially like this with the help of compound interest is to invest it wisely. And that means moving savings out of cash and into things like real estate and index funds.
Only then can those dollar bills start multiplying like rabbits and put you on the right track to reaching all your big financial goals.
How to Get Over Your Fear of Investing
The best way to overcome fear of the market starts with understanding a little bit more about how people do a great job of A. losing money and B. making it.
Of course, that’s really far more complicated than just a single blog post can cover, but hitting the highlights will still prove the point.
People lose money in the market when they:
- Give in to groupthink and herd mentality; they do what the majority does without thought.
- Try to pick individual stocks that are about to skyrocket in value (and then losing their shirts when those stocks flop instead).
- Attempt to time the market by selling when they think prices are high and buying when they think values are low; this typically backfires in the worst way.
- Want to dramatically outperform the market every single quarter, so participate in an active investment strategy that has them constantly buying and selling assets in an attempt to get ahead
- Or they let an investment manager do that — actively manage assets — for them.
People earn money in the market when they:
- Ignore all the hype and contribute money to investments consistently, regardless of what the market is doing.
- Don’t allow their emotions to control financial and investment decisions.
- Plan to invest for the long run rather than trying to make money as quickly as possible by constantly trading.
- Choose low-load or no-load funds and avoid fees charged by overactive investment managers.
- Understand they can’t outperform the market all the time for years and years; instead, they choose to simply follow the market and end up with a larger average return than the investor who grabbed big gains.. and racked up even bigger losses.
The market may be difficult to predict and impossible for your to personally control. But this shows that it is 100% possible to control your own behavior and stay out of your own way.
Yes, the market will go up. And it will go down hard, too. That’s not something to live in fear of and work to avoid if you’re investing for the long-term: these fluctuations should even out over decades.
You’ll determine your financial success or failure by the decisions you make with your investments far more than the market on its own is capable of doing for you.
And just remember: inflation will devalue your money as surely as a bad investment will. (Which is another reason why it’s important to invest now — you have the time to let the market sort itself out!)
Resources to Help You Move Your Money from Out of the Mattress and Into the Market
I know this is all easier said than done. It is terrifying to think about putting your hard-earned cash into something like the stock market.
I used to be stubbornly against the market because I thought there was no way for average people to invest without being scammed by some sleezy stockbroker or investment manager. And yes, those people are out there! But there’s no reason you need to trust them with your money.
Thankfully, the Internet has put a wealth of information within everyone’s reach. If this is your starting point, that is awesome — but don’t let it be the finish line, too. Check out the information and links I’ve provided for you below, and then keep doing your research.
Ask questions. Seek answers. Google the absolute shit out of anything you don’t know or understand and read until your eyeballs are ready to fall out of your head. You are sitting on an incredible source of knowledge. Take advantage.
That doesn’t mean I’m going to send you away with nothing. First, I’ll explain what I believe is the smart way to get started investing when you’re in your 20s and 30s. Then I’ll provide you with some great links that every Millennial should check out for more education on why investing is not the big bad scary monster we want to think it is.
My Theory: Index Funds Are Your Friends!
Two words for you: index funds.
Index funds are like those as-seen-on-TV rotisserie chicken cooker thingys. Set it and forget it. While it (unforunately) isn’t that simple, it’s pretty close.
Index funds simply track a segment of the market. They aim to mimic what that market segment does — the goal isn’t to outperform, just to ride along with.
Yup, it’s boring. But it works.
This is currently how I invest. I hold total stock market funds (both US and international), bond market funds, dividend stock funds, and REIT funds. All are index funds and are no-load and have minimal expense ratios — this means I maximize my earnings, because I’m not having to pay much in fees or expenses.
I max out a retirement account tied to my work, a Roth IRA, and contribute any extra to a general savings account that hold invested funds. I make those contributions every single month regardless of what the market is doing.
Again, that’s just what I do — remember that personal finance is personal and not everyone will have the exact same plan. But your key takeaways are:
- I make a monthly contribution without fail.
- I leave my money alone once it’s been contributed to investments because I’m looking at the long game.
Must-Reads for Millennials Wanting to Invest
Ready to take your money to the next level and get serious about growing wealth? Here’s what else I would recommend checking out:
- Burton Malkiel’s The Random Walk Guide To Investing: this book breaks the complicated subject of investing down into 10 rules for financial success. It will explain the why behind the argument for passive investing with index funds. Start here.
- These three posts from Matt at Mom and Dad Money:
- The Stock Market is Falling! In Other News, Grass is Green!
- There’s Always a Reason Not to Invest
- The Beginner’s Guide to Index Investing
- I like this post from Mr. Money Mustache, specifically the part that talks about four different reasons people give for avoiding the stock market. He then quickly explains why each person’s approach can lead to trouble.
- The other reason I like that MMM post is because it contains a curated list to a fantastic series of posts “for those uncertain about investing” from Jim Collins. Speaking of, his post on a simple path to wealth is also well worth a read.
Bottom line: your money isn’t doing you much good in your mattress. Keep some cash savings as appropriate, but don’t fear investing. You need to invest your money in order to grow your wealth.
What’s holding you back from making investments? Are you still keeping your money in the mattress or are you ready to create real wealth by investing?