Young people face challenges when it comes to saving. For most people, their 20s and 30s are a time of relatively low earnings, and splurging on big-ticket items such as a fancy vacation, car or house can mean going deeply into debt.
Recent research shows how this dynamic is affecting the current generation of young people. According to Moody’s Analytics, adults under age 35—the so-called Millennial generation—had a savings rate of negative 2% in late 2014.1 That means Millennials are spending more money than they are earning. Their negative savings rate contrasts with a savings rate of about 3% for those aged 35 to 44 and 13% for those 55 and older.
Keep in mind that those rates are just a snapshot. Looking back several decades reveals that Millennials aren’t necessarily more profligate than previous cohorts of young people,2 and over a lifetime, rising wages can make it possible to save more in middle age than earlier in one’s career.
That’s not to say that failing to save while young is just a natural part of growing up, and therefore not a problem. The issue is that a lack of savings often means a lack of investments. Not being invested means forgoing the benefits of compound growth—when the earnings from an investment are reinvested and can generate earnings of their own. Even a small amount of money taken out of every paycheck and invested early on can make a big difference later in life.
Here’s an example of how compounding works. If you put away $600 annually for 10 years and never invested it or earned interest on it, you’d have $6,000 at the end of 10 years. But if you invested that same amount over the same time and earned 6% each year, you’d end up with $8,383, almost 40% more.
1Josh Zumbrun,“Younger Generation Faces a Savings Deficit,” The Wall Street Journal, 11/9/2014.
2Catherine Rampell, “The Coming-of-Age Ritual of Spend Now, Save Later,” The Washington Post, 11/13/2014.