Forget that myth that millennials are bad with money. If recent surveys are accurate, 20- and 30-somethings are excellent at saving money and building up stacked savings accounts.
In fact, 38% of respondents to a recent survey said they saved half their paychecks. Half reported cutting back on the money they spend on nights out to make that happen, and 42% said they were foregoing pricey vacations in favor of saving more.
That’s really encouraging, because if you’re in your 20s and 30s today, you’ll need your savings if you want to be financially successful in the future.
But you also need something else that a lot of millennials are skipping out on: your investments.
The Big Risk You Take by Saving Money (and Not Investing)
If you’re like most people in this demographic, you remember the Great Recession as something that did a lot of damage to your family’s financial situations.
Maybe family members got laid off or lost their homes. Maybe you saw your parents’ dreams of retirement sail out the window as the market trashed their 401(k)s and nest eggs.
You might have even struggled yourself if you graduated college and found that no one would hire you because they weren’t hiring anyone. Even if you could find a job, it was probably low-paying — and that low starting salary could have set you back financially, even years into your career.
In the wake of the recession, people blamed banks and we saw the Occupy Wall Street movement take over the streets of New York for a time. All of this could have understandably left you feeling like the stock market in general couldn’t be trusted — and it was safer just to save.
But there’s a problem with that logic. Yes, investing comes with risk — but you can also invest strategically and in a way that allows you to grow wealth while properly managing the risks you take.
Even more important to understand if you’re a diehard saver but refuse to invest your money? Saving comes with risks, too.
Yes, even if you put your money into a regular ol’ bank account, you’re taking on risk — and over time, that risk becomes greater than if you had just put that same amount of money into a conservative investment portfolio in the market.
The biggest risk is inflation. The average long-term rate of inflation is 3.22%. That means that steadily over time, the money in your bank account loses value. In a few decades, your cash will be worth less than it was when you started saving.
The historical rate of return for the S&P 500 over the last 90 years, on the other hand, is 9.8%. While your cash is likely to be worth 3% less in 30 years than it is today, your investments would likely be worth significantly more.
Here’s What to Do to Build Enough Wealth to Enjoy Financial Freedom
Don’t misunderstand: saving money is still critical to success. But you should consider investing, too. Not convinced? Consider this:
- All investments come with risk, but some are less risky than others. If you can’t stomach the thought of potentially losing some of your nest egg, there’s a conservative portfolio for you! In other words, investing doesn’t have to mean throwing all your money into Bitcoin. It’s not all or nothing.
- Asset allocation and diversification help you manage risk so you can earn a return without losing everything.* Nothing is guaranteed anytime you invest (and really, what in life is 100% guaranteed, anyway? Nothing!). But there are a lot of strategies you can use to help you earn the return you need to meet your goals — without putting too much of your money at risk. Asset allocation and diversification are two such strategies you should use to your advantage.
- You have to invest to grow significant wealth. Unless you’re independently wealthy, most people need to invest in order to accumulate enough assets to reach big goals like financial freedom. That’s thanks to compound interest, or compounding returns.
Compounding returns are what make investing pretty magical. Compounding happens when you put cash into an investment and it earns a return. You keep that return in the market, and then it can earn a return, too.
That creates an exponential effect that snowballs over time. (You can check out some examples of the power of compounding here if you don’t know how it works.)
You May Want to Invest If You Want Financial Success
The bottom line is that you need to invest at least some of your savings. You don’t have to invest everything and in fact, you should keep a small cash cushion that you can quickly, easily access in the event of an emergency or if you have an unexpected expense you need to deal with now.
But otherwise? Put your money to work for you (so you don’t have to work so hard yourself).
Investing isn’t gambling if you have the right strategy in place and know how much risk is appropriate for you and the goals you want to reach. It can sound complicated (and maybe even a little scary), but don’t forget that you shouldn’t do this alone.
That’s especially true if you’re avoiding investing simply because you don’t know how. It’s okay if you’re not an expert. That’s why you would hire a financial advisor who can not only show you how to invest strategically, but also focus on your entire financial life to help you meet your goals.
A good financial planner can provide you with comprehensive advice that considers your savings and your investments, and how you can leverage both to enjoy financial freedom as quickly as possible.
*Diversification/Asset Allocation does not ensure a profit or guarantee against loss.
The information presented is not intended as financial advice, and you are encouraged to seek such advice from your financial advisor.
PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of these web-sites provided here, you are leaving this site. Our company makes no representation as to the completeness or accuracy of information provided at these sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, sites, information and programs made available through this site.