When millennials were asked, in a Merrill Edge report, what they could rely on in 20 years, the vast majority said their savings account.
This response is concerning because the current interest rate on a savings account is so low it would take 137 years for the money to double, versus seven years if that money was invested.
A savings account is not an account for hoarding money. Many millennials don’t realize this because the account provides a false sense of security. The funds in a savings account provide a feeling of wealth and accomplishment. This feeling is short-lived. When an individual grows old, they realize the money in a savings account is nowhere near enough to be able to retire. Unfortunately, most individuals find out when it is too late. For everyone else who still has time, you have to know the true purpose of a savings account.
A savings account should be used to hold money that you can access in the event of an emergency. In other words, a savings account is an emergency fund. This account should be used to hold about 6 months to 12 months of expenses and not a dollar more.
What causes millennials to save more than they should?
The tendency for millennials to save a lot of money can be attributed to their parents. Parents exaggerated the financial crisis of 2008. This left many millennials fearful of the stock market. Parents have since failed to disclose to their children that their investments have tripled since the downturn.
Millennials need to realize that the stock market might have a few dips. But ultimately, it always recovers. The stock market, over the long-term, always goes up. This is an obvious truth, yet it seems to elude many millennials.
The fear of the stock market forces millennials to place all their hard-earned money into a savings account without realizing that, by doing this, they are actually losing money.
“You mean to say I lose money when I save?”
And I know it sounds counterintuitive, but it is a fact.
“Why do I lose money by saving?”
You lose money because inflation erodes the purchasing power of your savings. By definition, inflation is the increase in prices of goods and services. Everything costs more with time. Everyone knows this. So, the money you place in a savings account (which isn’t growing) is losing value each year because it will be used to buy products (in the future) that will cost much more than they do today.
That is why investing is very important.
Your ability to retire will largely depend on your investments, not your savings.
Investing is also the most effective way to make money without selling your time. The moment you realize that the money you make from investing isn’t tied to the number of hours you work, that’s when the light bulb will go off in your head!
Investing = Freedom
Investing allows your money to work for you, so you don’t have to work for money. If you want a life where you can eventually give up the 9 to 5, you have to learn how to invest. Or, you can continue saving, and plan to work for the rest of your life.