If you’re an average millennial, you are probably very conscious of socking money away.
You know that Social Security allotments are not likely to be enough when retirement rolls around for you. Rent prices are insanely high in desirable places like New York, San Francisco, and Boston. It makes sense to buy, but who can afford the high down payment? With high rents, overpriced everything, and, let’s not forget, student debt loans higher than past generations, many millennials choose to live in the moment instead of planning for their future.
But the fact is, you should be studying investments and tips for saving money. They are one of the most important things you’ll ever do for your overall style of life and well-being when you’re older. There are a ton of extra investments millennials don’t necessarily think about, but should. You may be tossing money away, but 70 percent of the millennial generation keeps their extra money in cash. Cash is broadly defined: it can be certificates of deposit or savings accounts (or even the jewelry box your grandmother left you if we’re being honest). The problem with cash is, the return on your investment is very low. With other types of investments, it can be much higher. Let’s look at some of these investments to see where that socked-away money could go.
- Matching 401k Plans
Like other millennials, you may be saving for retirement. You may even already be saving in a 401k plan. These have to be offered by your employer, but if you have access to one, you should definitely take advantage of it. A 401k is a type of retirement plan in which you save a certain percentage of your income. It is taken out pre-tax, so it lowers the amount of taxes you pay.
Be sure to check whether it is a matching plan. “Matching” means that your employer matches some percentage of the funds you put in. A 50 percent match means they will match half of what you contribute. In other words, if you’re contributing 3 percent of your salary then you’ll get an extra 1.5 percent from them, free. It’s pretty much free money that you just can’t touch anytime soon. Sweet, eh?
Make sure that you are contributing as much as you can. Some companies set a default but will allow employees to save at higher percentages.
- Home Buying
Does buying a home seem scary and expensive? It can, because of the high amounts of down payments and other costs associated with buying a home. Owning a house, though, is one of the best ways Americans have to build credit and equity. Paying off a mortgage shows you are responsible. If home prices appreciate, you are building solid equity. If they don’t, you are still very likely saving money over rents. Rents generally go up. A mortgage payment can be stable. You obtain tax deductions for property tax and interest payments. Those are benefits you will never get through renting.
However, 66% of today’s borrowers are not confident with their knowledge of the mortgage process. If you’re concerned that you fall into that category, consider talking to a banker. They can help you through the process, and give you knowledge about things like putting together the 20 percent down payment. They will likely tell you to consider a loan through the U.S. Federal Housing Administration (FHA).
FHA loans are offered through lenders such as credit unions and banks but insured through the U.S. government. As a result, down payments can be lower. For this year, they are between 3.5 percent and 10 percent, depending on your credit score and other requirements. Check with a FHA-approved lender to find out what you are eligible for.
- Stocks and Bonds
You have to choose where you will place any savings you have, including retirement savings. The stock and bond markets can be good places to put them.
Here’s an example. Over the years 1926 to 2016, folks who had a portfolio 70 percent invested in stocks and 30 percent invested in bonds had an average annual return of 7.2 percent. That’s far higher than any return on cash.
Stocks can be risky. That average annual return was composed of “up” years where investors saw 28 percent returns and “down” years when they saw their portfolios lose more than 14 percent. But the fact is, they return higher than any other class of investment on a steady basis.
Concerned that you don’t know enough to start investing in stocks or bonds? Beginning with an index fund that tracks the broad markets, like the S&P 500, is a good way to start. Consult a financial advisor or read up on investments before you take the plunge.
- Precious Metals
While many people don’t think of precious metals as an investment, a certain percentage of your portfolio in them can make sense for diversification.
Gold, for example, has done very well this year, with returns of more than 9 percent. Gold is often dubbed a “safe haven” investment. People tend to buy it in times of turmoil, like wars or high inflation. When many people buy it, the price goes up. Gold can be purchased in coins or bullion.
What do you have your savings in? It might be in cash. If it is, consider a 401k retirement plan, especially if your employer offers a match, a home, stocks, and bonds, or precious metals as a more prudent home for your hard-won savings. All of these investment vehicles offer appreciation and benefits above what people earn with cash.
Planning for your future isn’t necessarily always fun, but there are plenty of unique ways to go about it. It’s important to sometimes skip the extra margarita on Friday to sock away a few extra bucks. Don’t get me wrong, living in the moment is fun, and learning to do so is important in managing stress. However, if you can find the balance between living in the moment and making a reasonable effort to plan for the future, you’ll find yourself with some really great savings by the time you’re retired. Trust me, your future self is going to thank you!
Featured image via WeHeartIt.