Millennials and Money: When to Save and How to Invest

Many millennials consider the stock market risky and opt instead to utilize savings accounts for their future income. But could this prevent them from the potential gains associated with investing in stocks and bonds?
Amanda Carrozza
Published: January 15, 2018
Millennial MoneyNearly 10 years after the start of the Great Recession, Americans are confident about their financial futures. This is according to the Merrill Edge Fall 2017 Report, which detailed a number of surprising revelations about Americans’ personal economic outlook.

Compared with a decade ago, Americans reported feeling more successful (48 percent) and more confident (45 percent) about their investments in 2017. However, when it comes to the future of the country, it’s millennials (age 18 to 34) who aren’t wearing rose-colored glasses. Eighty percent predict they’ll see another recession in their lifetime and three in 10 think it will happen within the next five years.

The Millennial Mindset
In many ways, it seems that entering the workforce in the midst of an economic downturn has shaped how millennials value their income. According to the survey results, 85 percent of millennials are likely to “play it safe” with their day-to-day investments, which is considerably more conservative than their parents (46 percent) and grandparents (35 percent).  

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And whereas Generation Xers reported they’re more likely to depend on outside sources for income in 20 years, millennials’ top response was their savings account (66 percent). This shows that those newer to the workforce value a self-created and self-funded source of income and are willing to sacrifice in other areas of their lives to bolster savings — 54 percent said they would cut back on going out and 42 percent said they’d skip vacation for a year.

Are They Missing Out?
But is favoring a savings account preventing millennials from the potential gains associated with investing in stocks and bonds? And how can a novice veterinarian wary of another recession even begin to invest?

On average, less than a third of people aged 18 to 29 owned stocks between 2009 and 2017, according to a Gallup survey released in April. In addition to having a lack of money to invest — veterinary school debt adds up quickly — nearly half of millennials say investing is “too risky,” a BlackRock study says. But financial professionals still argue that stocks have delivered bigger returns than both cash and bonds over the long run, and that investing in the stock market is a vital part of retirement planning.

Investment Advice
The first step for people of every age looking to initiate an investment portfolio is understanding the available options:
  • A stock is a share of ownership in a company that can go up or down based on investors’ collective evaluation of the company’s performance.
  • A bond is a debt security to a company or government entity that agrees to pay you back in a certain number of years, and in the meantime you earn interest. 
  • Mutual funds are a mixture of investments that are chosen for you and managed by an individual company.
You’ll also need to contemplate your short- and long-term goals and the level of risk you’re willing to take. In the stock market, there is a risk-return tradeoff, with stocks (the riskiest of the investments) providing the highest probability of gains.

A good rule of thumb for gauging your risk level is to anticipate how long you’ll be investing. If retirement is decades away, you’re more likely to make money over time in the stock market than with less risky assets, like placing all your money in a savings account. Alternatively, if you are saving to put a down payment on a veterinary office within the next five years, you’re more likely to lose money in stocks over a short time period.

Unfortunately, there is no magic number or equation that will dictate what amount of money to invest initially, but you should ensure that after investing you still have enough income and savings to support your monthly bills and any unforeseen circumstances that may arise. Often brokerage accounts (Fidelity, AmeriTrade, Charles Schwab) will require an initial investment and account minimums. An alternative would be to invest in a Roth IRA, which makes the most sense if you expect your tax rate to be higher during retirement than your current rate. 

Yes, it is probable that there will future economic downturns, but investing early in your career means you will have decades to grow a significant return.

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