“Do you think it’s the right time for me to start investing, or should I wait a bit longer?” I am asked this question all the time. If someone is now in their 20s or 30s, that would make them a Gen Z or millennial.
Millennials have been labelled as “the lost generation” because of how behind they are in building their wealth compared to past generations at their current stage in life. Millennials have also been reported to accumulate less wealth during their lives.
A survey by Deloitte looked at more than 23,000 millennials and Gen Zers internationally and found that almost half of them were living paycheck to paycheck. Cost of living was also one of their biggest concerns. This isn’t surprising as inflation rates have hit all-time highs. Student loan debt and the rising cost of living and rent are holding back the younger generations from achieving what their parents and grandparents used to when it comes to saving.
The last decade has witnessed a widening of the wealth gap, with none other than the younger generations falling at the bottom of the hierarchy. Millennial faced mounting student debt burdens, rising inflation, high rents and stagnant pay. They are now heavily indebted and have delayed in building their careers, which is why being a millennial is frequently tied to having anxiety about money.
After accounting for their debts and rent, there is really little income left for saving and investing. However, there is still some ways that Gen Z and millennials can start to accumulate their wealth and plan for a sustainable retirement. This is because younger generations have time on their side. Therefore, they can take advantage of the use of compounding in investments. The idea is to start small and their money will grow over time.
Having a safety net of savings to fall on, makes wise financial sense no matter what someone’s financial situation is. An emergency fund is crucial if someone ever loses their job or they need to make a down payment for their first home or to start a new business. Once there is enough cash in the person’s stockpile, it is important to start reallocating some savings to investing in order to maximize the amount of money earned, whether it is for building wealth or planning for retirement.
The main rule of thumb is to make sure that there is access cash when needed which means meeting certain minimum requirements before jumping into the stock market. There are a couple of aspects to look at before jumping into saving or investing.
The first step is to look at how much cash is needed to fall back on if necessary, before deciding whether to save or invest money. The common advice is to build up short-term savings and then proceed to invest any surplus cash that is left.
For this method, a high-yield savings account would be the perfect option as it comes with close to zero risk. On the other hand, when investing, money can go up or down in value depending on the volatility in the market, adding to the risk involved.
Savings account, even the highest yielding ones offer a considerably low return compared to investment accounts. Sometime even the high-yield ones, offer a lower return than the inflation rate, meaning inflation will still erode the value in your savings account. Therefore, for goals with a longer time horizon, it is important to consider other ways of allocating funds apart from saving accounts.
In conclusion, it is never too early to start saving and investing. The decision on whether to save or invest is all depending on the individual’s circumstances, goals and risk appetite. However, it is nonetheless, important to at least start saving up to take advantage of the compounding effect of interest.
With the harsher and more unpredictable economic climate, the younger generation such as Gen Z and millennial are at the shorter end of the stick and should be even more cautious and proactive in planning their finances properly.
The recent Covid-19 pandemic also saw a lot of job losses, which a lot of young adults ended up completely pulling away from the corporate world. They were either choosing to become a freelancer or to start their own small business.
Such decisions take on more risk due to the uncertainty of income flows and a lack of job security. This is also why most younger generations are not keen to bear children due to the high expenses, inflation and a hyper-competitive world that is different to their parents.