A friend passed along an interesting article talking about the financial mistakes made decade by decade. The mistake made by those of us in our 20’s and 30’s were: playing it too safe, and being overwhelmed by complexity. Reading the article and seeing that stats it listed really made me sad! Saving and investing when you’re young is super important and something I’d like to try to encourage you to do!
Why we play it too safe
Most of us recall the financial crisis of 2008. We either saw our parents or grandparents lose their jobs, have their retirement lose a 1/3 of its value or struggle to make ends meet. We saw peers older than us struggle to find jobs after graduation. We recall the angst and concern over our financial future. Thankfully, the economy came back (with many retirement accounts gaining back that 1/3) and many of us were able to find decent jobs. However, it’s still hard to shake that feeling of helplessness; watching so much of your hard earned money vanish right before your eyes. A shocking 70% of our net worth is held in cash. Either this means it’s hidden under our mattresses (better move it before the roommate finds it) or it’s earning a few dollars worth of interest in the bank. We’re really playing it way too safe here.
Why the time to take risks is now
What occurred in 2008 was certainly out of the ordinary, but no one can say for certain that it won’t happen again. What we can say is that we’ll continue to see periods of growth, and periods of declines. There will be some years that your retirement account will return 20% and then other years that you’ll be down 20%. Historically though, there have been more ups than there have been downs, and it’s generally been an upward trend. That’s the idea of saving for retirement. Sure; if we’re talking about money you’ll need 2-5 years from now; then certainly you may not want to put your money in riskier assets like stocks or mutual funds. But, it we’re talking about retirement, which for many of us is 30 years down the road, your portfolio will be able to weather the good and the bad years and will most likely experience more good years than bad years and you’ll end up with a nest egg that will support your in retirement. By not investing when we’re young and have a long time to weather the storm, you’ll be missing out on years of appreciation and dividends, which ultimately is where most of the growth comes from.
Be a risk mitigator…and take appropriate risks
None of us will ever get rich by saving our money in a savings account. None of us will be able to comfortably retire and stop working when we are old by putting money aside each paycheck into the bank. The only way we’ll be able to retire comfortably is to take risks. The old saying goes, “no risk, no reward”. Only by taking some risk will we be able to glean a reward, and that reward is not just the 0.1% that your bank pays you to keep your money there. The recommended amount to save for retirement is 15% of your income, which should be invested (in my opinion along with the majority of the financial advisor’s community opinion) in the stock market; in a good balance of low-cost mutual funds. So when you’re considering your investing, feel confident in the ‘risks’ you are taking…its only 15% of your income! You’ll have 30+ years to let your money grow and weather any ups and downs that may come your way. As you get older in life; then will be the time to reduce the riskiness of your investment; shying away from growth stocks and turning more towards bonds and lower risk investments.
There will certainly be a time to be risk averse, but in our 20’s-30’s, it’s probably not the time!
Keep It Simple, Silly (K.I.S.S.)
In terms of complexity, I certainly hear that concern a lot when I meet with readers to discuss their finances. I even admit that I can sometimes get overwhelmed too. However, don’t let that feeling of being overwhelmed hold you back from investing. I’ve written a good article on the subject (How should I invest my retirement?) but to make things easy, I personally invest most of my retirement (and recommend others to do the same) in a Target Date fund. For me, I’ll probably retire around the year 2055, and so I’m in a 2055 retirement fund. This retirement fund will auto shift and adjust for risk tolerance throughout the course of the fund. That means right now, it’s heavily in growth stock and international, but over time will turn to more large, established stocks and then to bonds. It’s a great way to ensure that my retirement is staying on track in terms of how much risk I should be taking.
Saving for retirement is such an important step that we as millennials in our 20’s and 30’s need to take, and we should be taking an appropriate amount of risk (i.e. not in cash) during this time. Don’t be overburdened by fear of loss or the feeling of being overwhelmed keep you from investing in your future!
Quick plug but I do offer and conduct 1-on-1 financial discussions with readers! I’ve had a lot of success meeting with people in the past and have gotten really good feedback on it. Sessions can be held over Skype and are $25/session. Shoot me an email if you’re interested: ben at youngmoneyfinance.com