“You don’t have to skip the lattes to save money for the future.” That is the opening line to a New York Times article on personal finance that I recently read. I find personal finance to be a fascinating subject. Perhaps, this owes in part to the fact that personal finance is not something commonly taught in schools. Unlike reading, writing, and arithmetic, personal finance was something I chose to learn about and was never tested on. As a millennial in part-time employment, knowing the basics of saving, investing, and retirement is important information to internalize and act on now for a better financial future.
Research shows that our parents’ financial behaviors can have a significant effect on children’s financial outcomes. A study has found that children whose parents were bankrupt or had significant credit card debt were more likely to quickly spend rather than save financial gifts. Similarly, parents who express frequent worries about debt are more likely to have children who hold similar attitudes about debt.
Looking back on my childhood, it is clear that my parents passed on a “save now, spend later” financial attitude. Whenever my siblings or I received money for Christmas or our birthdays from relatives, my mother would say that most of it would go into our college fund, leaving us with just a small portion of the cash (if any at all). When we grew older and started to do chores for money, we would put our coins and bills into colorful Disney princess piggy banks. It was fun to feel our banks grow heavier and heavier. Physically feeling our savings grow made us reluctant to spend anything for fear of lightening our loads. With their own finances, my parents also demonstrated a savings-first mentality. I remember when we went on vacation as a child, my mom would usually mention how it was important to save and plan in advance to make such trips happen. Today, as a 20-something, I put away savings from every paycheck and feel tinges of guilt whenever I consider making a large purchase.
While even children are familiar with the concept of spending and saving, investments and retirement are two financial activities that many do not confront until adulthood. A poll stated that the median age at which workers begin saving for retirement is age 24 and that 71% of millennial workers are saving for retirement. Luckily, many employers offer company plans, which make saving for old age relatively simple. For those who are not in benefits-eligible positions, a Roth IRA (individual retirement account) is a great way to start saving for retirement. With these accounts, contributions are made after tax and allow for future tax-free withdrawals. There are, of course, restrictions and early withdrawals incur a penalty, however, saving even a little consistently when you are young or between jobs, is better than missing out all together. Even if your paycheck is small, compound interest will work in your favor, especially with a long time horizon.
While millennials are doing okay on the retirement front, young investors are a bit more scarce. According to an Ally Financial survey, 66% of people aged 18 to 29 say investing in the stock market is scary or intimidating. Stocks fall and recessions happen. If you are close to retirement age, it is important to keep an eye on your portfolio and ensure that you are protected from extreme volatility. If you are younger, it is okay to invest more in stocks (riskier) than bonds (less risky). You will experience loss in your lifetime, but investing in index funds (portfolio of stocks/bonds that are representative of the financial market) will generally always yield long-term gain.
Most of us never formally studied nor were tested on personal finance. It is important for us to learn how to save, invest, and budget to achieve our goals and take control of our financial futures. Debt is not always bad and investing is not always good. However you choose to allocate your money, it is important that you are knowledge about the tools available to you and understand the risks associated with your decisions. Unfortunately, the U.S. seems to be sliding into another recession. Times like this make it even more necessary for us to be able to make informed decisions about our finances and futures. It’s not a popular thing to say, but at the end of the day, money is important. Dear Reader, I hope you manage your finances in a way that allows you to live according to your values and in a way that brings you joy.