This is the second guest post by David Chen, dealing with millennial investing. (His first post, defining what a millennial is, can be found here.)
Millennials are a generation just starting to come into their own in the workforce. The oldest of us are starting to really take off in our careers while the youngest of us are just graduating from college. We’ve just taken over as the largest generation in the workforce, making up the majority of workers in the U.S. With thoughts of the workforce come thoughts of retirement. What happens to our generation once we retire?
Our parents and grandparents relied primarily upon pension funds, and even the promise of social security, to fuel their retirement plans. Unfortunately for our generation, pensions have largely gone the way of the Dodo birds, and even social security is on a fast track to going bust before we’ll get our hands on it. Our generation, more so than any that have come before us, need to invest sooner, smarter, and better than ever before. So, let’s talk about what Millennials can do to get started in investing.
Setting Realistic Goals
Luckily, our generation has a long horizon for investing if we get started now. With even older Millennials just in their early 30s, there are still decades to nurture nest eggs. Time is the most important factor when creating wealth because of the magic of compound interest. The most important goal that anyone can set for themselves when it comes to investing is to start early, because even small amounts will snowball when given enough time to grow exponentially. Just make sure it isn’t a knuckleheaded move.
Beyond starting early, it’s important to set realistic goals. Do you want to travel? Do you have dreams of retiring in another country? How much money do you realistically need to have set aside in order to live to 90 or beyond? Part of this depends upon when you hope to retire and part depends upon how much your retirement years will cost you. These are personal questions that might require a little research and a lot of postulating.
Short-term, you can and should set goals for yourself that revolve around the money you need to invest each year in order to make that long-term retirement goal. Many experts advise saving 20 percent of your paycheck and investing that into a combination of 401k and other investments. That 20 percent is not applicable to everyone; after all, everyone’s income situation is different and starting earlier or later is sure to influence that decision. Just as a rule of thumb, it would take approximately 41 years to save 25 times your annual income by saving 20 percent of your paycheck. If you plan to retire at age 65 and live roughly 25 years beyond that, you would need to start saving 20 percent at age 24. This is already assuming an average 5 percent annual return on your investments. If you are past age 24, you may need to save more aggressively or plan to retire on less income.
Making it Automatic
Saving money is difficult. Our generation has plenty of expenses right now, and at a young age, it can be hard to fathom expenses that far in the future! However, there are ways to make investing less painful.
Millennials are increasingly turning to apps devoted to financial management including investment choices. There are several mobile apps that are favorites among Millennial users. The biggest challenge that first-time investors face is simply how and when to get started. There are some mobile apps that make it simple and easy, and many of these allow for very personalized stock choices. Then there are “robo-advisers” that will choose a portfolio for you automatically after asking just a few questions about your preferences and plans. Whatever your investment style, there are apps out there to fit your needs.
Other Ways to Save
Everyone with access to a tax-preferred savings account, such as a 401k, should be taking advantage of it. This goes for every generation, but especially for ours. Money you contribute to a 401k or Roth IRA account can ease the pain of reaching that 20 percent goal per paycheck. In fact, many argue this should be the predominant form of investment, one that is in yourself. The money automatically comes out of your paycheck, and in some cases, it can be matched by your employer up to a maximum percentage. Those matching funds are free money – so take it!
Dave Chen writes for his own blog, Millennial Personal Finance, which he got his hands on after graduating college. He spends his spare time putting some effort into this blog in the hopes that some people will take notice and learn a few things.