There are several tried-and-true investing rules. For example, never sell low, don’t invest funds that you need to keep liquid, and don’t panic when the market dips (because it’s not a matter of “if,” but “when”). But while these tidbits are helpful for investors in all walks of life, there are some things that millennial investors should practice in particular.
The reason for a unique investment approach is that millennials are at a unique crossroads. The struggles they face are different than those of any generation before them, which means that their investment strategy must also be just as unique. But what exactly does that entail?
What Millennials Face
Millennial households are earning more than ever before, even after accounting for inflation. They are more likely to have a degree than past generations, and they have more technology (and thus, information) at their fingertips than their parents could have ever imagined.
Of course, it’s not all good news. This younger crowd is projected to live longer than their parents and grandparents, which sounds great until you consider that they will now need to save significantly more for retirement and healthcare. Millennials are also crushed by student loan debt, rising housing costs, and impossible healthcare expenses, all of which have the ability to decimate the growth of their net worth.
Plus, pensions are nearly gone and Social Security may not be around when it comes time for them to retire.
Add all of this together, and it’s easy to see why this generation needs to be very intentional about their investment strategies. With so many hurdles to overcome and a longer lifetime to prepare for, investing is not just something they should do, but something they must do.
The Right Kind of Investing for Millennials
So, what is the best way for these 23-38 year-olds to invest their money? There are a few important rules to follow.
Save Early and Aggressively
This rule is smart for all investors; by cutting expenses and saving as aggressively as possible very early on, you set yourself up for success. Not only will you learn to live on less, but you’ll reap the benefits of compound interest over many decades to come, growing your money greater than any other strategy.
However, this strategy is particularly important for millennials, as these young adults are waiting longer to get married and have children, waiting to buy a home, and even living at home with their parents to save money. This makes it easier to be an aggressive investor in those younger years, before the obligations of a family and a mortgage take over.
Millennials also have time on their side. This generation is out of college and well into their careers, but they still have 3-4 decades of investing ahead of them before retiring. This not only means more in earned interest, but allows them to take on bigger risks for bigger rewards without jeopardizing their retirement.
Take the Tax Benefits
Investing doesn’t have to mean buying individual stocks. In fact, there are excellent tax benefits offered to those who choose IRAs and/or 401(k)s for their retirement savings.
Both traditional and Roth IRAs offer tax breaks to contributors; one offers these benefits when contributions are made, while the other offers them when it’s time to actually use the savings in retirement. Millennial investors should find the one that looks like a better fit for their income and financial future, and contribute up to the annual maximum.
Employer-sponsored 401(k) plans are tax-advantaged, too. This means that contributions (to a certain limit) are made with pre-tax money and offer an income tax break, as a result. Plus, the account’s growth is not subject to taxation until it’s time to make withdrawals.
Never Leave Free Money Behind
While we are on the topic of 401(k) plans: millennials should never ever skip out of contributing to a 401(k) plan if there is an employer-match offered. This benefit -- where an employer will match contributions into a workplace retirement plan up to a certain amount -- is quite literally free money.
If nothing else, contribute just enough to max out the employer match benefit each year, and read up on the employer’s vesting requirements. Then, enjoy the free money.
Watch For Fees
Millennials shop around for deals on everything, from cars to used textbooks and everything in between. So, why not shop around for the best investment advisor rates, too?
With the advent of robo-advisors, investors today can now enjoy hands-free management of their investment portfolios. Largely gone are the days of calling up a stock-broker to make a trade, too. All of this, for a fraction of what our parents and grandparents would have paid a one-on-one advisor.
In addition to saving on fees, many of these robo platforms also allow investors to make informed decisions about their portfolios, and even pick the funds that fit their passions.
Make a Difference with Your Money
Millennials have the ability to make easy, informed decisions about investments, based on their passions and beliefs.
Thanks to socially-responsible investing, today’s young investors can choose companies and funds that focus on important causes. Whether that passion includes protecting the oceans, developing clean energy, providing clean water to those who need it, or campaigning for marginalized social groups, there is an investment option to suit.
Managing an investment portfolio is rarely simple or stress-free. However, millennials have unique challenges when it comes to their own financial planning, which makes conscious investment decisions imperative.
By following the rules above -- and making smart money moves on a daily basis -- these young adults can successfully prepare for the future.
