Millennials get a bad rap when it comes to making personal finance decisions. But while we may enjoy our avocado toast, surprisingly enough, we're also saving more money than previous generations. We also tend to save more conservatively and our aversion to taking risks may prevent us from reaching our full wealth potential.
Here's what millennials get right about their money and where room for improvement exists.
1. We wait too long to start
Even though experts have long recommended starting an investment portfolio as young as possible, many millennials hesitate when it comes to opening their own trading accounts. This results in missing out on the opportunity to sit back and watch our money grow through compound interest.
Many of us utilize savings accounts but relying solely upon these avenues prevents us from letting our money do the heavy lifting for us. Most savings accounts pay relatively little in terms of interest, often less than 1%. Throwing all our money into savings accounts earns us mere pennies for each $100 we invest.
Instead, millennials need to harness the power of the stock market which provides far more in terms of long-term financial gains.
2. We overvalue cash
Because we came of age during an era of financial crisis, millennials shy away from the stock market. But this hesitancy costs us big time in terms of future economic freedom.
No reward comes without risk, and by far the easiest way to reap huge financial gains remains investing in high-yield growth stocks. The best time to take any financial risk occurs before age 35, before the expenses related to home ownership and child-rearing require more financial conservancy.
Stashing away a small amount of cash under our mattresses for emergencies can't hurt, but wasting valuable time simply saving for a rainy day impacts our long-term wealth. If you're hesitant about investing on your own, hire a qualified financial advisor to manage your investment portfolio.
3. We miss out on tax deductions
Failing to diversify investments means missing out on valuable deductions come tax time. While interest from savings accounts gets taxed at the same rate as ordinary income, the capital gains tax rate remains substantially lower.
In addition, certain types of investments, such as investments in oil and gas partnerships, allow taxpayers to take advantage of government subsidies to offset any potential risks to capital.
Millennials do themselves a disservice by failing to seize these opportunities, as experts predict no decrease in demand for these resources over the next few years.
Even making an additional contribution to a 401k or other qualified retirement account can offset tax liability but far too few of us take advantage of this potential tax-buster!
4. We don't do enough diversifying
Even though one out of every six millennials possesses over $100,000 in assets, few take the time to adequately diversify their investment portfolio. A strong portfolio consists of a mix of high-risk, high-yield stocks, steady, reliable blue-chip stocks, bonds and other forms of property.
Failing to diversify costs us big time in the long term. No matter how much cash we stash away today, inflation remains a powerful force that decreases the value of each dollar saved over the life of our savings.
The only way to account for price increases due to inflation remains investing in the stock market, where gains have a reasonable expectation of keeping pace.
5. We ignore history
Many millennials, myself included, tend to panic when we hear news stories of the stock market rising and falling at breakneck speeds. Indeed, current fluctuations in the Dow tempt many of us to pull out of riskier investments in exchange for less risky vehicles such as bonds.
Savvy millennials, though, resist the temptation to abandon ship.
Historically, investments in the stock market pay off over the long term. Market ups and downs tend to balance out over time.
Despite saving more than ever, we millennials need to educate ourselves about the importance of building a diversified investment portfolio.
Being willing to take greater risks while we're young will lead to a wealthier, more financially free retirement down the line. We millennials must learn to make our money work for us!
