As we continue to up our financial game, sometimes it helps to take a step back and observe. What are millennials doing with cash and savings today? How do our spending habits compare to the advice given by Home At 30?
Let’s take a look at what millennials are doing with the almighty dollar in today’s post. In particular, one glaring habit is brought to light. Unfortunately, the result of said habit is millions of dollars down the drain!
The Flaw in the Plan
Financial habits of millennials are somewhat surprising once you start to look into the numbers. The millennial generation differs quite a bit (financially) from generations of the past. Historically, people placed much greater faith in the financial system. Pensions, 401k’s, and the equity markets were seen as safe havens for our paycheck.
As our friends over at Cash Crone have detailed, the baby boomers have a different money mindset than the young professionals of this day and age. Free-spending and racking up a large amount of credit card debt is quite common for older Americans. The young folks of this generation are taking a significantly different approach to spending and saving.
This brings us to the flaw in the plan: Millennials are “saving” way too much. This might seem counterintuitive… isn’t the goal of financial freedom reached by being frugal? We shouldn’t be out there every few weeks blowing through our paycheck, right?
The fact is, there is more than one way to save your money responsibly. It doesn’t have to be in a Bank of America vault either. A lot of today’s young professionals are doing it the wrong way, which we are about to explore below.
How Exactly Do We Save Too Much?
Per a recent report by Merrill Lynch, the millennial generation prefers “saving” its money in a savings account over the previous three generations.
“In stark contrast to older generations who are relying on outside sources for their future financial security, millennials are looking to their self-created savings years down the line. Millennials place even greater trust in their own stewardship than they do in their personal relationships with their significant other and friends.”
The key to this entire article is in the quote above. “Outside sources for their financial security” is what we’re talking about here. In the past, people have put their money into the market and let it work for them over time with interest and economic growth. Today’s generation lets money sit stagnant in the bank more than ever before.
This is the multi-million dollar flaw in the plan. Both strategies (bank versus market) can be considered a form of “saving your money”. What’s key to remember is that saving in a bank account does almost nothing for accumulating long-term wealth. Saving in the markets can make a massive difference, especially when you start early.
Money in the Bank
We talk about interest rates quite a lot in our posts, as they are the ultimate financial lever in determining the costs of our everyday lives. The interest rate paid out for keeping your money in a savings account is laughably small! As CNN Money comments:
The average savings account has a measly 0.06% APY (annual percentage yield, or interest), and many of the nation’s biggest banks pay rates as low as 0.01%
Imagine putting away $10,000 in a savings account, just to earn a whopping $6 of interest over the course of a year?! This is the kind of growth we see in the average bank account. Despite that, millennials are putting cash away in the piggy bank more than ever before. You can barely even call it interest, as inflation grows at a quicker rate than your tiny return on a savings account.
There has to be a better way to save, millennials. 0.06% just isn’t going to cut it for anyone interested in financial independence. Luckily, there are a TON of alternatives out there, all with different risk profiles. Whether you favor a very risky high-growth or more conservative/safe strategy, the market will almost always yield more than the bank.
Money in the Market
We have covered the basics on smart investing here time and time again. Putting your money into the market, with the right background research, yields much better results than your stagnant bank account. And, there are so many different investment vehicles to choose from.
I wrote about the value of ETF’s a few months back – just looking at the stock ETF’s provided by Vanguard, the lowest yielding of them all returns 5.11% (over the last twelve months). We see Treasury ETF’s at the top also yielding positive interest with longer-term options. Recent economic growth means the “safe haven” of Treasury’s is less appealing than the markets, hence the downtrend. In the long term, however, they are all much better than the bank.
Beyond ETF’s, we have mutual funds, 401k’s, and other ways to make your cash work for you.
The bank should be a place for your emergency funds and cash you need on hand for daily life. Beyond that, putting it into the market is a game changer that most millennials don’t take advantage of.
“Saving” Wisely as a Millennial
Today’s post might seem like a basic concept, but it’s so important to get a handle on. Saving wisely doesn’t have to be hard or complex.
Many millennials who don’t understand finance very well end up running for the hills and keeping everything in their piggy bank. Previous generations use the markets to get more bang for their buck, and so should we. Financial independence begins with making that hard-earned money work for you, right off the bat.
So have a look at some of our material on investing and ETF’s, and get that stack of cash out from under the mattress! You’ll never be able to retire early if you’re getting no interest. As your nest egg continues to grow over the years, you will be glad you did.
All opinions expressed on this blog are solely those of Home at 30 and are in no way affiliated with any other organization or institution. The purpose of this blog is to give general education and information about investing, wealth, careers, and college; It is not intended to be professional advice.
Author: Joe Savoia
Joe is a 2014 graduate of Northeastern University and currently works in a field sales role for technology company Acquia. He has worked internationally as one of Acquia’s earliest Australia-based employees and helped in the early stages to develop that region. Today Joe is based out of Boston and lives in Somerville, MA. Joe’s primary interests vary widely, including everything from robotics/AI to finance, blockchain, and the rapidly evolving world of tech we live in.