4 Reasons Millennials Can Benefit From Investing Early

Millennials make up 40% of our workforce, and in less than 10 years from now, that number will be 75%. This generation of young Americans face a number of financial hurdles, including student loans debt, lower quality employment, stagnant salaries and the rising housing prices. But in spite of all that, they tend to be good savers, according to the 17th annual Transamerica Retirement Survey of Workers.

Another impressive statistic is that over 70% of Millennials have started saving for retirement.

Still, millennials admit they don’t know much about investing. Nearly a quarter of them invest mostly in low-risk, low-return investments like CDs, money market funds, cash in saving accounts among other low yield investments.  Research has shown that this generation is investing cautiously in spite of having many years till retirement to weather storms in the market.

There are many reasons as to why millennials are nervous about investing. Many feel they don’t know enough about the market and couldn’t afford to invest anyway. In addition, many don’t feel there’s a need to rush into it or simply they feel it is not the right time.

However, investing in the stock market can help millennials accelerate their savings and achieve their retirement or other financial goals faster. Here are four reasons why millennials can benefit from investing in the stock market early:

Reason #1. Time is on your side

One big advantage Millennials have when it comes to investing is time. Millennials have as many as 35 to 45 years to accumulate retirement savings, which means you’ll also be able to take advantage of compounding growth. (see: Investing $100 a month for 30 Years: Is It Worth It?)

Here’s an example of how compounding works:  Say you make a single $10,000 investment at age 20 that grows at 5% each year until you retire at age 65. Your investment would be worth $89,850 after 45 years, assuming you re-invested the earnings from all of those previous years.

Now assume you invest the same $10,000, but wait until you’re 40 to do so. With only 25 years for the investment to grow, your investment would earn $55,986 less than if you had started at age 20 assuming a similar rate of return.

To get a sense of the how the power of compounding works, take a look at the following chart. This chart shows how investing $100 a month for 30 years could represent a significant amount in the long term.

This is a hypothetical example that is demonstrating a mathematical principle provided by bankrate.com. It does not illustrate any investment products and does not show past or future performance of any specific investment. These examples do not take into account any fees or expenses that may occur in an actual investment. The calculation assumes contributions on a monthly basis of $100. 

The chart above explains how you could earn nearly $142,000 by investing $100 a month for 30 years at a rate of return of 8%. We chose 8% as the rate of return because the overall U.S. stock market has returned a little more than 8% in aggregate per year for the last 90 years. The term ”in aggregate” means some years the stock market has generated less than 8% or even negative returns, while some other years it has generated more than 8%. It’s important to note that past returns never guarantee a future outcome. 

If you are one of the people who understand the power of compounding and the benefits of investing early but have no idea where to start or how to invest, you are not alone. At Stash, we guide you with recommendations based on your risk profile so you can start investing with as little as $5. After answering a few questions in our app, we will assess your specific risk profile and tell you what are some of the investments that might work. To take your risk assessment and start investing by subscribing just click here.

Reason #2. Put your money to work

Investing allows you to put your money to work with the expectation of a return. In general, the more risks you are willing to take, the higher returns you are likely to get. That said, it’s important to evaluate both your risk tolerance and risk capacity when choosing your investments.

Risk tolerance is the amount of risk you’re willing to withstand. Risk capacity is how much risk you are able to take on, based on your individual financial situation. Keep in mind, stable investments feel “safe,” but they can limit the return of your investments.

High return investments might feel “exciting” but the amount of risk involved in those investments is very high. The key is to find the right mix of risk based on your risk profile and financial goals.

The reason investing, even with the inherent risk, can sometimes be a more effective strategy than keeping your money in a savings account is because when you invest in the stock market, you are exchanging cash for fractions of ownership of companies, commonly known as shares or stocks. When these companies grow in sales or profit, they usually increase in value. When they generate losses or have stagnant or a declining growth, they usually lose value.

Whether you are saving for a big purchase (such as the down payment on a house) or a big life event expenditure (such as a wedding or your child’s education), investing can help you get there . When you invest through Stash, you are buying fractions of companies through ETFs, an investment vehicle that allows you to invest in multiple companies under one umbrella. Below is American Innovators, one of the 40 ETFs we offer through the Stash app. If you were to invest say $5 on this ETF, you would be investing in companies like Apple, Microsoft, Facebook, Google among others.

 

If you are ready to exchange cash for fractional ownership of companies within an ETF, check out the ETFs that we offer through our app.  

Reason #3. Make Retirement a Reality

Many financial experts recommend setting aside 10% to 15% of one’s income towards retirement. And while many Americans have 401(k) plans through their work, a shocking two thirds of them do not take advantage of them. Don’t sleep on this benefit if you’ve got it — and take advantage if your employer matches contributions to your retirement portfolio.

No 401K? Don’t fret, there are other ways to start saving for the future. A Roth IRA or a traditional IRA are other investment tools to help get you to your retirement goals.  Want to know which one might work for you? Read more here.

There are lots of excuses for not saving for retirement. But getting started is easy. A well-diversified portfolio of investments (stocks, bonds, funds) can balance out your risk. You don’t need large sums of cash to start investing in an IRA. Stash customers can start investing in a Traditional or Roth IRA account with as little as $15. You can sign-up to get Stash here.

Reason # 4. You can save money on taxes

Did you know that saving for retirement can also help you save money on taxes? IRAs are tax-advantaged retirement accounts, which means you can either invest your pre-tax earnings or pay no taxes when you withdraw your money when you retire, depending on your plan.

If you have a traditional IRA, your contributions are tax-deductible on both state and federal tax returns, but withdrawals are taxed at the ordinary income tax rates. With a Roth IRA, you get taxed when you make a contribution (add money to your account with your post-tax dollars), but earnings and withdrawals are typically tax-free.  As a Stash customer, you get access to Stash Retire. 

If you want to start investing through a tax-advantaged retirement account, simply go to the Stash Retire section in our app and click on “get started”. You can download Stash for free from the App Store for iOS devices or from Google Play for Android devices.

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