Savings Vs Stocks: A Millennial’s Guide to Investing

It will probably come as no surprise that millennials are less likely to invest their earnings in the stock market.

Millennials grew up during one of the worst recessions in history, so many prefer to park their money in cash savings instead of investing it in the stock market, which is perceived as risky.

Unfortunately, basing your investment decisions on one small snapshot of financial history will lead to drastically worse outcomes when it comes to your retirement.

Let’s briefly crunch some numbers and see why stocks vs savings is really no contest at all.

Stocks Vs Savings: The Numbers

The cash savings that many millennials now prefer may feel safer in the short term, but in the long run, it is a guaranteed way to lose money.

Let’s take a generous cash savings rate of 1.5% and look at what happens when a base amount is compounded at this rate over the standard 30 year period for retirement savings.

After 30 years at 1.5% annual return, an investment of $10,000 dollars would be worth $15,630. Think about those numbers: if you manage to save $10,000 for your retirement this year, you will only have earned a little over $5,000 in interest after 30 years of saving…hardly the stuff of retirement dreams.

This analysis of savings doesn’t even account for the impact that inflation has on the purchasing power of your money, with historic rates of inflation at 2% meaning you are actually losing purchasing power each year by saving your money instead of investing it.

Not let’s turn to the returns from investing in the stock market.

Assuming a historical return rate of 9% per year over the same 30 year retirement saving period, your initial $10,000 would be worth $132,676…meaning you would earn more than 20 times the return on your investment when compared to saving over the same period.

These numbers show that when it comes to stocks vs savings, it really is no contest over the kind of time span that people are saving for their retirement.

The Dark Years of Investing

Ok, so taking the average stock market return over a long period of time is great, but what about those years, such as the last recession, where the stock market loses tons of value?

This is a reasonable concern, but there is one simple solution: just stay in the market and don’t try to time your investing.

Some people will start investing during a period of low stock prices, and they will see their returns rise faster in the long run and end up with a slightly larger retirement pot than the average investor.

Others will start when stock prices are at a peak, and they will see their initial investments fall in price before the long run effect of the stock market takes hold, and they will end up on the lower end when it comes time to retire.

However, even the worst case scenario from investing in the stock market will still be many times greater than the return from savings.

It is impossible to tell which investor you are going to be, the lucky or the unlucky, so the only solution is to ignore it altogether and start plugging your earnings into your investment accounts as soon as possible.

Stocks Vs Debts

One area where millennial investors do need to be cautious is in the area of debts.

Millennials are the most indebted generation thanks to soaring housing, healthcare and education costs. This means that you need to get your debts in order before it is worthwhile to start investing in the stock market for your retirement.

This doesn’t mean that you need to pay down every last cent of debt before you can start saving, but it does mean that you need to get your finances in order and ensure that any high-interest debts, such as credit cards, are refinanced or paid down.

There is no point in putting money into the stock market at an average 9% when you are paying 15% or more on one or more outstanding debts.

Everything Is Gonna Be Alright

Despite growing up during one of history’s worst recessions and being loaded down with debts that previous generations couldn’t imagine, millennial investors will be just fine in the end.

As long as you get your finances in order and start investing in your 20s, the magic of compounding and the long run returns of the stock market will take care of the rest for you.

If you really want to get ahead, look into managing your own investments or day trading to ensure that you are getting the most potential returns from your investments. This can mean the difference between retiring after 30 years like everyone else or retiring wealthy while other people are still grinding away at their 9 to 5.

(Via Warrior Trading)