My son just graduated from college and soon will be starting his first job. I don’t want to overwhelm him with information, but I do want to make sure he starts off on the right foot with his finances. What would you suggest?
At 80 million strong, millennials outnumber every other generation in America.1 As a group they tend to be socially responsible, committed to their values, and less likely than previous generations to follow traditional family or career paths.
But here’s the rub: According to Deloitte, many millennials also have an innate distrust of financial institutions and money managers. On top of that, they tend to be risk averse, with less than 30% of their wealth invested in the stock market.2
This concerns me not only as a financial planner but also as a parent. As a proud mother of three millennials, I want to do my best to help them—and their peers—become fulfilled, independent and productive adults. And I believe a big part of that is introducing them to prudent money management and investing.
If you have millennials in your life who could use some help getting started, consider passing along these three tips I always give to young investors—including my own.
1. Make saving a habit
Building a secure financial future starts with saving. That might sound simple, but knowing how much to set aside and where to put it can get confusing, especially when you’re working toward multiple goals. That’s why the Schwab Center for Financial Research developed our Savings Fundamentals, listed here in order of priority:
- Capture your match: If your employer offers to match a percentage of your contribution to the company 401(k) or other retirement plan, contribute at least enough to capture the maximum. Otherwise, you’re walking away from “free money”.
- Cut back on credit card debt: Yes, credit cards are convenient, but they also can lure you into spending more than you can afford, leaving less for savings. Personally, I can think of no bigger waste of money than paying interest on credit card debt. If you’re in over your head, make a plan to pay off persistent balances as soon as possible, then redirect that money to savings.
- Build a rainy-day fund: Even if you’re young and healthy, expensive and unexpected events can occur. Aim to save enough to cover three to six months’ worth of necessary expenses, such as food, insurance, rent and utilities.
- Prioritize retirement: Finally, revisit your retirement savings. When you’re in your 20s, a good goal is to put away 10% to 15% of your gross income. If you wait until your 30s or later to start, you’ll need to set aside a much bigger chunk of your paycheck.
Once you’re on board with these four steps, you can expand your horizons. This can be a good time to save toward the down payment on a home or a major vacation, or to accelerate payments on long-term debt such as student loans. Calculate how much you’ll need and start socking away any disposable income.
2. Start investing
With your savings in place, the next step is to start accumulating long-term wealth by investing. Before you begin, make sure you understand the basics:
- Go slow but steady: Sometimes, the hardest part of investing is getting started, and that’s where dollar-cost averaging comes in. With this strategy, you invest a set amount of money at regular intervals—say, once a month. When the market is down, your allotment buys more shares; when it’s up, your allotment buys fewer shares. Over time, this approach allows you to build a sizeable portfolio without having to venture too much, too quickly.
- Put your eggs in many baskets: Diversification means spreading out your investments across and within asset classes by distributing your money across different sectors, industries and companies, for instance.
- Take advantage of your age: Sustained time in the market is perhaps a young person’s greatest investing asset, thanks to the miracle of compounding and the cumulative growth potential of stocks. Dipping in and out of the market, on the other hand, is a good way to derail your plan.
- Understand your assets: Markets go up and down, but over the long run, stocks (as measured by a broad market index like the S&P 500®) have grown in value—and quite a bit more so than bonds or cash investments.
I also urge young investors to take advantage of technology such as robo advisors, which use algorithms to construct and manage a cost-effective portfolio based on your goals, time horizon and risk tolerance.
3. Seek advice
My final suggestion for every young investor is to ask lots of questions along the way. Talk with your parents, take advantage of online resources and in-person workshops, and ask for help if you hit a roadblock. The world of investing is large and complex, but turning to a knowledgeable and trustworthy expert can help you become a confident and informed investor.
Carrie Schwab-Pomerantz (@carrieschwab), CFP®, is president of Charles Schwab Foundation and senior vice president of Schwab Community Services at Charles Schwab & Co., Inc.
1Anthony Cilluffo and D’Vera Cohn, “10 Demographic Trends Shaping the U.S. and the World in 2017,” Pew Research Center, 04/27/2017.
2Daniel Kobler, Felix Hauber and Benjamin Ernst, “Millennials and Wealth Management: Trends and Challenges of the New Clientele,” 06/2015.