Cash reigns supreme when it comes to millennials. No other generation in history has more affinity towards cash than this tech savvy and revolutionary group of individuals.
Experts are of the opinion that the reasons behind this relationship with cash and reluctance to invest are plenty. These include:
- Unwillingness to invest in stock from their parents’ experience of undergoing the Great Recession
- Increasing student loan debt
- Substandard wages
- Lethargic job market
- Inability to participate in retirement plans
This is echoed by a recent report by the National Institute on Retirement Security. According to the report, more than 66% of working millennials have little to no savings.
This poor performance in financial management is in stark contrast to many other areas in life. Millennials are known for their excellence in many fields. In fact, they are considered capable of doing anything.
But as you will begin to realize, making the right investments while you are working can be the best decision. It is the ultimate buffer and preparation for when you are ready to retire and indulge your golden years.
The reason why you have stayed away from investing could be your sublime confidence in your youth and abilities. Other reasons might be that you are skittish in the system and don’t have confidence in it or you simply have no idea where to start.
Whatever the case, this comprehensive post is an attempt to help you understand the best investment options for working millennials.
Short Term Investment Options
When it comes to investment, a commitment that is five years or less is a short term investment. Short term investment options for working millennials are a great way to save up for essentials like a house, a car, or even an education.
Apart from having the option to access your funds earlier, it is also a great way to test the waters of the investment world.
Your options include:
This is a bank account where you can save little or big depending on your capacity. Here you will earn a small amount of interest on a monthly basis. All reputed banks have savings account options, so there is no reason for you to miss it.
Short Term Bonds
Short term bonds, particularly US Treasury Bonds, are a great option. The interest rates range anywhere from one to two percent, and the term can be anywhere from one month to many years.
The best option is to purchase a bond that has a payout from one to three year. It is because they are not as sensitive to interest rates as long term bonds.
Overseas governments typically offer these types of bonds. The risks are higher, but so are the interest rates. Investing in corporate bonds is an excellent way to increase your earnings in a relatively short term.
However, it is a good idea to collect as many portfolios of the bonds and double-check their creditworthiness before you make an investment.
Peer to Peer Lending
P2P lending or peer to peer lending functions without the need of a traditional bank. Investors typically use platforms such as Prosper and Lending Club. This investment carries less risk than stocks and yields higher interests than most short term investments.
Certificates of Deposit
Also known as CDs, it works in the same way as the savings account. The only difference is that a certificate of deposit typically has a higher rate of interest. It is a good option if you have a definite plan, such as buying a car after some years.
However, there is a catch. CDs can only be withdrawn after they attain maturity. You will have to pay a certain amount if you do so before the term is over.
It is perhaps the most common investment option offered by financial service providers. It is a good option if your investment timeline is not limited to a few months. Mutual funds have negligible fees and are also managed passively.
Mutual funds typically attempt to deliver better results than the overall market, as well as the stock market. The best way to maximize your earnings is to buy shares that invest in established and popular companies instead of stocks.
Long Term Investment Options
Long term investments are those that have a term of ten years or more attached to it. Apart from having a couple of short term investments, it is also a good idea to venture into long term investment. If you are a millennial who has been working for a number of years, it would not be wrong to assume that you have a steady income.
Although short term investments are a great way to increase your savings and have a safety net, long term investments can set you up for life up to retirement. They are also a great way to have a steady passive income.
Long term investments also bring more income than their counterpart. Another excellent advantage is that investments that are left idle for a couple of decades get a break from taxes.
Your options include:
Exchange Trade Funds
Exchange Trade Funds (ETFs) trade similar to stocks, but in reality, they are more like mutual funds – ETFs have lower expense ratios than most mutual funds. The minimum investment is also lower than some mutual funds.
ETFs work by passively tracking an index. One of the popular indexes tracked by ETFs investors is the S&P 500. There are options called baskets to invest in bonds and multiple stocks or other assets like gold.
They are very versatile, as you can invest in a number of fields, including technology, healthcare, or even social media and cannabis.
Equity Index Funds
Equity Index Funds have more risk attached to them than bond market index funds. It can seem challenging, but when you are considering long term investment, this is a good thing. The higher risk will also mean your returns will be higher.
Apart from this, Equity Index Funds also come with a number of features that make them an ideal option for long term investment. These include diversity, low cost, and no need to be hands-on, as well.
Growth Mutual Funds
Mutual funds have a significantly higher return on investment. Some of these can yield interest as high as ten percent, which is a substantial amount. They are also less risky than individual stocks.
Working millennials should consider investing in mutual funds that have good exposure to different industries and sectors. If you have the right professional guidance, it can also be a great idea to invest in international stock through these funds as well.
However, mutual funds can be an expensive investment, so weigh the pros and cons before committing. Mutual funds that have an expense ratio of one percent are best avoided.
Target Date Funds
As the name suggests, these investment options have a specific date attached to them. You can choose a particular fund with a time that you assume will be a good retirement year for you.
They are a typically stable form of investment and do not include risks that are involved with stocks. This is also the reason why some are of the opinion that Target Date Funds are too traditional. But they are a good investment option for retirement.
Investing in individual stocks and buying shares is not for the faint of heart or the ill-informed. However, this is an excellent investment for working millennials who have money and time on their hands.
If you feel up to it, look for credible companies that have had steady growth for years and also have the potential to keep growing. On layman terms, companies that have a combination of good cash flow and high valuation are the best choice. Companies that deal with different products and services are also better than ones that cater to a single product.
As your confidence grows with investing in shares, you can invest in smaller shares with companies that are not very steady. The risks can be high, but the returns can be very handsome as well.
Why are Millennials Reluctant to Invest?
According to surveys and researches, a vast majority of millennials are reluctant to enter this relationship with saving and investment. Although their tenacity for flexible and alternative lifestyles may be to be blamed, the problem goes deeper than that.
Below are some of the reasons why millennials do not find investment very enchanting.
Not having enough to spare
Not surprisingly, one in three millennials says the number one reason they do not invest is that they don’t have the funds to spare. Or at least they feel that they do not have the funds to invest. In many cases, these individuals understand the need to save, but they don’t.
Awareness and having access to the right help can change this mindset to a large extent.
Rising student loans
An average student loan in the US is as much as $31,172 per student. It takes anywhere from 10 to 30 years to repay the debt. It is more than a 145 percent increase as compared to average student loans in the 70s. This is a staggering amount that has some millennials blaming it solely for their inability to invest.
Not having the right knowledge
As surprising as it may be, many millennials still consider financial investments to be an old person job. This outdated perception has put off many young working and affluent millennials from associating with financial investments.
Apart from equipping them with the right knowledge, online tools and other technology can help make the transition a lot more seamless and friendly.
Another surprising and revealing reason why almost a quarter of millennials do not invest is their unrealistic expectations. As much as 15 percent of millennials expect that they might get a break and win a lottery, which will prepare them for their retirement. Another 11 percent hope that they will get an inheritance or gifted with money. This was revealed in a research that was carried out by Insured Retirement Institute and the Center for Generational Kinetics.
This is quite a revelation. Although it may seem pretty plausible to the proponents, it is the worst reason of all.
No confidence in the system
As is evident from a number of research and surveys over the years, millennials are deeply scarred from watching their parents struggle through the recession. This is one of the primary reasons they do not have confidence in the system, which prevents them from investing.
In one research, as much as 65 percent of millennials believe that Social Security cannot provide them with retirement income.
Why Millennials Need to Start Investing
It is often questioned whether millennials will even have the opportunity to retire and enjoy their later years. The reasons include the current structure of the retirement savings plan and not being eligible to access employer-provided plans, among others.
However, with a little bit of effort and planning, there is no reason why you cannot enjoy your golden years to the fullest.
Apart from the reason of having a comfortable retirement, other reasons why you need to start investing are:
Rise in the costs of living
It is no secret that the cost of living witnesses a significant increase every year. The Bureau of Labour Statistics estimates that the average costs of living from 2016 to 2019 have almost doubled.
While the average cost of living was $48,885 in 2016, in 2019, it was $99,431. This is one of the worst expectations versus reality scenarios. The alarming part is that almost everyone in the United States believes that $36,000 per year is enough to make a comfortable living.
The smartest decision is to start investing as soon as you can. You don’t have to go out and start buying shares straightaway. However, the sooner you start investing, the sooner you will gain experiences and confidence in it.
Along the same lines of the rise in the costs of living, inflation is a real threat. According to a number of experts, a three percent increase in inflation reduces the value of $36,000 to just $14,831 in three decades.
By the time millennials reach the retirement age, inflation coupled with increased housing rate and cost of food and commodities will be significantly higher.
While it is understandable that you are skittish about investing, financial experts agree that investing in stocks is the best way to invest your money.
It is safe to say that almost every millennial has some sort of debt. It may seem counterproductive to consider investing in stocks when you have a crippling debt that tightens its noose every month. However, investment does not only have returns, but helps in the formation of capital.
If you have a lot of debt, consider one of the following moves:
- Pay your debt regularly – It will improve your credit scores significantly. You will also be able to secure loans with the best possible interest rates.
- Extend the repayment period – This will reduce your monthly payments, and you can use the extra cash to think about investing.
Investment vs. Saving: What’s the Difference?
These two terms are used almost interchangeably. However, at the core, investment and saving are two different things.
Let’s look at the differences between savings and investment.
Savings usually refer to cash that is put aside from disposable income. It acts as a buffer for emergencies or buying expensive items that are too pricey to be purchased at the moment.
Savings are typically put away in bank accounts. However, they may also be in Liquid Fund Mutual Accounts. The returns from savings are not of considerable amount, but it is better than nothing.
Unlike the olden days, when it was considered smart and safe to keep your money into savings, it is not the case anymore.
It is because the interest rates are meager. It is almost never affected by inflation, which is like a double aged sword. Another reason why financial gurus don’t advocate savings is that maintenance fees of the account can drain your money.
Investment is typically referred to as putting your money into buying shares, property, or even gold. The returns from investments are significantly higher.
It is a transaction that aims to yield returns and also produce capital for savings and other purposes. Investments usually have a high risk attached to them. Unlike the money you put aside for savings, you cannot have immediate access to investment money.
Getting Started on Investment
Here are our top recommendations on how to start investing.
Audit your debt.
The first step is to take stock of how much debt you have. This can include everything from student loans, rent, utility bills, and credit card bills. After you know your cost of living, only then you can decide how much you have to invest.
Work on the debt.
Many experts agree that the best strategy is to pay off smaller loans. This keeps you motivated as you work your way through the debt, slowly but surely.
Alternatively, you can also employ the debt avalanche method. Here, you will be paying off the higher interest debts first. However, you need to be committed and steady, as losing sight can become a challenge.
After these two steps, now you can start working on how and where to invest with the extra money you have.
Find the money.
After you decide to start investing, it is a commitment. Most financial companies require a down payment or seed money to start an investment.
Your savings can come in very handy to kick start this journey. It is also a good idea to set aside some money every month in a separate account for investment.
Ways You Can Make Investment Achievable
Millennials, or digital natives, are considered risk-takers. Although they face a lackadaisical economy due to no fault of theirs, they handle everything like a champ. Many of these young achievers still view investing as a risky dance, but not investing or saving is riskier.
According to research from an economist at MIT, millennials need to save as much as 40 percent of their total earnings, if they want to retire at 65. This is a staggering amount in comparison to the conventional recommended 15 percent. This is all the more reason to make smart investment options as soon as possible.
Compared to the last decade, millennials have a number of ways to make investment options much more manageable. Among the best ways you can facilitate your investment goals is to use financial tools.
As the generation that is synonymous with technology and digital tools, one of the best ways you can achieve your investment goals is to use online tools. These are just a few swipes away, and you can learn everything from your smartphone.
You can do everything from getting professional advice, reviewing a financial portfolio, and monitoring all your investments. According to Forbes, personal finance companies that are also tech-related have channeled more than one billion dollars towards young investors that run mobile-enabled platforms in the past few years.
Some of the most popular online tools that are changing how young people manage their finances are:
- Tip’d Off – Peers help each other to invest in a stock. It is great for amateurs, as well as veterans.
- FutureAdvisor – The platform allows users to manage funds by paying a small fee automatically.
- Mint – You can view all your financial accounts from any digital device. You can also synchronize all your current investments, credit and debit cards, as well as bank accounts.
- Wealthfront – You pay a low fee on this wealth management system.
- SigFig – Access automated financial advice on this free online service provider.
- Acorns – The app keeps track of all purchases done from your debit card, as well as the credit card. The purchases are rounded up to the nearest dollar, and the difference is put into savings automatically. When this figure reaches $5, you can choose a financial portfolio, and the app will make the investment for you.