This is assumed to be due to being in their formative years when the 2008 recession happened. One expert noted that prior generations saw “plenty of boom times where the stock market was going up, home prices were going up, so they didn’t feel they had to save.”
Millennials saw that markets can go down and home prices can go down and placed more emphasis on emergency savings and a bit less on consumption.
That’s great news! The bad news is that Millennials aren’t investing the extra cash that they are stowing away.
The problem is that you need to be investing if you want to retire. Without the fallback of a defined benefit pension, Millennials are going to need to rely on compound interest to make their retirements a reality.
An Introduction to Compound Interest
For a more thorough explanation of the benefits of compound interest, I recommend checking out JD Roth’s 2008 post, The Extraordinary Power of Compound Interest, but I’ll give you a quick rundown here.
Compound interest is the concept of your interest earning interest.
You invest money. Your money earns interest. Your interest earns interest. Your interest’s interest earns interest. The longer your money is invested, the more this process can repeat and compound.
Basically, compound interest allows your money to grow exponentially. It is far more powerful than saving alone.
Let’s look at some numbers.
Let’s say that you invest $100 per month for 30 years and it grows at an annual interest rate of 8%.
At the end of 30 years, you will have saved $36,000. But your account balance will be over $150,000. You will have $36,000 of contributions and over $114,000 of interest.
The magic of compound interest has grown your contributions by over 400%.
(I highly recommend spending some time playing with a compound interest calculator. You can read all of the articles you want on compound interest, but you can’t really understand the full implications until you toy with the numbers yourself.)
Responses to Concerns
The studies that I referenced above listed a number of reasons that Millennials gave for choosing not to invest in the stock market. I want to address them each here.
- They don’t know how to invest in the stock market
Then learn! Sorry for being flip, but we live in an age where you can learn how to do pretty much anything online. We need to start prioritizing and making time for learning life skills.
And if you are here, then I am preaching to the choir. Thank you for coming and please pat yourself on the back for making an effort to learn and grow.
In a more helpful vein, first open an account. Then, choose your investment(s). Vanguard makes it easy to pick which mutual funds are best for you. Finally, set up automatic contributions to keep your money growing.
Don’t get too caught up on picking your investments up front. The important thing is to get started as soon as possible. You can learn more once you get started and adjust as you go, but don’t let the overwhelm of options prevent you from starting to grow your money. If you’re looking for a more in depth introduction to your options, I recommend checking out Jim Collins’s Stock Series which explains investing in a manner that is easy to understand for beginners.
- They don’t have enough money
A related sub-point to this is that they have too much student loan debt.
There are obviously cases where some people legitimately don’t make any extra money. They spend everything that they have on necessities and have no money left over.
This is not the case for most people. As we learned last week 25% of households making over $100,000 in the U.S. live paycheck to paycheck despite making more than 75% of the households in this country. These are people that need to spend less.
You can figure out where to cut spending by budgeting or you can force yourself to save by paying yourself first, but you need to find a way to create a gap between what you earn and what you spend if you want to be able to hit savings and retirement goals.
I understand the burden of student loans. Trust me. I’m there with you. But unless your loan payments and necessities take up your full earnings, then there is still money that you can squeeze out for investing if you budget or pay yourself first.
For tips on paying down your student loans and when to invest rather than paying them down as rapidly as possible, check out our post on How to Efficiently Pay Off Your Debt.
- The stock market is too risky
A lot of Millennials view the stock market as gambling. And maybe if you are day trading and trying to pick individual stocks that may be an apt comparison. But if you are investing for the long term in low cost index funds, then it really is more like the inverse of gambling in a casino.
In a casino the house always wins. You may win from time to time, but in the long term you are statistically going to lose money and the casino is going to make it.
In the stock market through the present day, the market has always gone up over the long term. There are periods where the market goes down, but it has always come back up.
Let’s look at the 2008 crash as an example.
If you invested in VTSAX, which is Vanguard’s Total Stock Market Index Fund, it hit a pre-recession peak of 37.72 on October 12, 2007. Let’s pretend that you had the extreme misfortune of investing $10,000 at the exact peak of the market.
VTSAX dropped to a low of 16.61 on March 6, 2009. Your $10,000 is now only $4,403.49! That’s pretty painful.
But what happened if you just held on to it? As of this morning, your $4,403.49 is now worth $14,278.88. Not only have you fully recovered from the worst loss of my lifetime, but you have added a significant amount beyond that.
And this example is assuming the absolute worst case scenario. You bought at the very peak of the market. You did not invest at all during the recession. You practiced none of the best habits for building wealth.
And you still made money in the stock market.
If, instead, you opted to put that money in a savings account earning 1% per year, you would have finished your nine year journey with only $10,941.73.
It is far more risky not to be investing. If you are trying to save your way to retirement, you are going to have a much more difficult path to tread.