Did you know those in their late 20s-to-30s have built up less wealth than previous generations had by the same age? The reason, cited in 2021 Boston College research, is student loan debt. Inflation, rising rents, credit card debt, and soaring medical expenses are also contributing factors, according to a multi-generational survey conducted by Deloitte in 2022.
It’s no wonder that roughly 47% of Gen Z and Millennials report they’re living paycheck-to-paycheck while approximately 30% say they don’t feel financially secure. 43% of Gen Z and 33% of Millennials say they’ve had to take a second job just to make ends meet.
Investing what you can, when you can
While massive debt and high inflation make it tough for younger generations to sock away 10-15% of their annual income, as financial planners recommend, it’s best to get in the habit of saving as much as your circumstances allow.
In the beginning, this may mean opening up an interest-bearing savings account where you can park funds until you need them. As of late September 2022, Bankrate.com says the average interest for most savings accounts is 0.13%. Though that won’t exactly help you grow wealth, it’s better than nothing for those who need to keep their money accessible—in an emergency fund, for example.
As your financial footing becomes surer, it’s time to consider making modest monthly contributions via an employer-sponsored 401(k), a personal IRA/Roth IRA, or a high-quality robo-advisor account, like Allio. Once you take the first step in securing your financial future, all of the sequential steps become easier—especially if you automate your saving and investing.
CNBC suggests you’ll want to get to a point in your early 20s where you can set aside a minimum of $14/day, or $420/mo., to invest for retirement. But before you wonder if that’s enough to carry you through your golden years, let’s talk about the magic compound interest. It’s the main reason you’ll want to start saving as early as possible, even if it’s just your spare change.
Let’s use that $14/day example to illustrate how compounding works. If you’re able to put away $420/mo. and earn 5% interest, you might think you’d only save around $200,000 over a 40-year period. But in actuality, you’re earning interest on the money you’ve saved and the interest you’ve already earned. It’s like receiving interest on top of interest, which can exponentially grow your money. So if you put away $420/mo. for 40 years — with a return of 5% — you’ll have more than $620,000. That’s at least $420,000 in free money!
No-brainer strategy #1: contribute to an employer-sponsored 401(k)
Speaking of free money, the 401(k) offered as part of your benefits package may come with employer matching. In 2022, Investopedia found that the most common employer match is 50 cents on the dollar, up to 6%. Now that you know about the power of compound interest, it’s easy to understand the impact that an extra 6% can have.
Even if your company doesn't offer matching, 401(k)s are a terrific investment vehicle for those getting started. They don’t require much market knowledge as you have the option to select a target retirement age. With target-date funds, an asset manager will make risk decisions for you and automatically rebalance the fund to be more conservative the closer you get to receiving a disbursement.
No brainer-strategy #2: open an IRA or a Roth IRA
Another retirement savings vehicle is an Individual Retirement Account (IRA). With a traditional IRA — or a traditional 401(k) — you won’t have to pay taxes on whatever you contribute until you start making withdrawals. Many financial planners recommend a Roth IRA where contributions are taxed up-front because you’d likely pay a higher tax rate later in life. If you anticipate being a high earner throughout your career, a Roth IRA is the smart choice.
No brainer-strategy #3: use a high-quality robo-advisor (like Allio)
If you’re a beginner, saving and investing can feel daunting and out of reach – like something only finance experts can do successfully. Well, it’s not. That’s why we created Allio; to provide financial wellness for all – even younger investors.
At Allio, we offer our clients automated global macro portfolios built on full-scale optimization. Macro investing, like what we offer at Allio, requires a deep understanding of stock market trends, cyclical analysis, and economic data. In the past, this has meant macro strategies have largely been available only to those with the resources to hire analysts and hedge funds skilled in macro analysis—essentially out of reach for the average (or beginner) investor.
Assets for our portfolios are selected based on an analysis of the prevailing macroeconomic conditions. As we believe U.S. stocks and bonds are facing significant headwinds in the intermediate- to long-term, our portfolios are highly diversified and contain exposure to other asset classes such as emerging markets, commodities, gold, equity REITs, and crypto.
When you choose to save and invest with Allio you’re getting the investment strategies of the 1%, for just $1 a month. Through round-ups, recurring deposits, and lump-sum investments, you can consistently and effortlessly save money that will be reinvested, thereby compounding (remember the magic of compounding!). We pride ourselves on our low fees, which lets more of your investment dollars stay in the market where they can compound and grow.