Recent studies indicate our nation’s youth are not investing in the stock markets. That’s nothing new. It takes a rare individual under the age of thirty to have the wisdom to invest at a young age. For those who do, their future could be golden.
A recent survey by Banknote.com, a personal finance company, found that just 26% of individuals under the age of thirty are investing in stocks. That number hits home when we compare it to the 58% of people between the ages of 50 and 64, who do invest in the stock market.
Part of this lack of interest in stocks can be attributed to young people’s attitude toward aging, retirement and death. When I was that age, I was invincible. Like me, at that age, the young believe they have all the time in the world to save. The younger you are the more difficult it is to identify with the concept of someday becoming too old to work.
But those attitudes account for only some of the reasons that under 30s shy away from investing, according to the survey. It appears that a lack of money and investment knowledge are also two important barriers to investing within this age group. Scarcity of funds in this day and age is understandable.
Between the financial crisis, income inequality, and the high cost of education, many young people cannot afford a place of their own, let alone the money to save and invest. Putting away even $100/month when you are unemployed or underemployed is a daunting challenge.
Their lack of investment knowledge simply underscores my contention that neither parents nor schools are teaching our children the importance of saving and investing (see my columns on “Kids and Money,” Parts I & II). Millennials are simply not equipped with the practical knowledge they need to make investment decisions once they are earning a paycheck.
It is a shame, because the absolute best time to begin saving is in your twenties. The most valuable asset these potential investors own is time. Another powerful tool at their disposal is compounding growth. Just how powerful is it?
Consider this: it will usually require just ten years (using a 7% nominal rate of return) for an investment account to double. Just imagine what one dollar invested at the age of twenty would be worth by the time retirement time rolls around forty-five years later. Many young people make the mistake of thinking that when they are forty and making the big bucks they will make up for lost time when it comes to retirement savings. Wrong! The $100/month saved when you are twenty-five is worth much more than the same amount saved at forty years of age because compounding rewards early contributions much more than later contributions.
Let’s say your annual income is $30,000/year and you decide to save 10% of your estimated after-tax income ($2,160). In twenty-five years those contributions will grow to $288,001 using a 12% annual return, which is the long-term return of the U.S. stock market. If you put that money into a pre-tax IRA, that amount would be exponentially larger.
Unfortunately, few Millennials will heed this advice and fewer still read my columns. So, do your kid a favor and pass this column on to him or her. They will thank you for it later.