Rethinking Savings & Investment for a Millennial
Times have changed in so many different ways. Savings and investment are no different. This article should not be taken as advice in any way, as everyone’s situation and goals are unique. However, we want to get you thinking of new, modern ideas and asking the right questions (rather than relying on outdated conventional wisdom). So let’s explore…
The Conventional Wisdom
A lot of so-called experts will tout savings as a must for younger people. They will make statements like “Make sure to invest 10% of your income and put it into growth portfolios.” They’ll tout funds, savings accounts, 401ks, and all sorts of other investment vehicles to house your savings. They’ll talk about retirement, saving for a house, and for your children’s college.
The rationale is simple. They assume we will retire at 65 years old. They take the average investment returns from the last 50 years and assume that will continue for the next 50 years. And then they use the power of compounding your contributions and returns to compute a number when you retire.
So let’s do a quick example. They might tell you to contribute to your 401k at 6%. They assume 8% market returns. They do the math and assume that will give you over $1 million in savings by the time you retire at age 65. That sounds quite appealing. All you have to do is save 6% of your income and you’ll be a millionaire someday. It makes for great marketing and it actually worked if your parents followed that exact same advice when they were your age. And as a bonus to the banks/financial advisory firms, they don’t need to hire financial wizards but rather good salespeople that can convince customers to sign up for their savings and investment plans.
Oh How Things Have Changed…
Savings are great. I hesitate to knock that advice, since getting the average person to save 6–10% of their income would make our society much better off. We live in a world where half of millennials don’t even have $1k in their bank accounts. We live in a world where a large percentage of our most populous generation (Baby Boomers) are on the verge of retirement with almost no savings. So anything to encourage savings is a win.
However, it’s not necessarily correct to make all the assumptions that the conventional wisdom gives. Here’s a short list of where they likely go wrong…
- Lifespans are likely to be much longer on average. This means we will work longer and need more money in retirement
- Health care costs and education costs have exploded in recent years. What plan is there to ensure you are covered for this?
- 8% return on investment is a bit ridiculous. This may have occurred during the biggest expansion the world has ever seen. However, growth has drastically slowed in many of the advanced economies. Birth rate is down significantly and there’s a huge percentage of people in retirement. Median income has not gone up for 20 years. Debt rates have exploded to unsustainable levels (and debt is a claim on future income). I think we would be lucky to get half that return
- Jobs and the income they are assuming over that time horizon are not guaranteed in the future. So much is being automated, which forces us to update skills and stay relevant in the changing economy
- Our governments have collectively destroyed savings. They have lowered interest rates to near zero, which means we either earn nothing on our savings or have to chase return through risky investments
- This government corruption scares me. Almost any country you choose has unsustainable debt at the national level. The reaction to servicing that debt has been to print money. The economist in me tells you this will do three things. First, it pushes interest rates down even further. Second, it creates mis-allocation of capital. And third, it results in inflation (at some stage). So saving your money doesn’t necessarily earn it returns over time, as either deflation keeps interest rates down (so your money doesn’t grow) or it creates inflation, which is basically a hidden tax on your savings. Government policy all over the world has penalized savings rather than encouraging it.
- I believe a serious economic event will occur at some stage (in every major country). Nothing from 2008 has been solved but simply kicked down the road and made worse to avoid a current recession. Anytime this has happened in history, banks fail. And before you say your money is guaranteed in the bank, consider that our modern banking system doesn’t actually have your money, as it’s almost all lent out. So if only a small percentage of people withdraw their money at the same time, the bank will be immediately bankrupt. I have zero confidence in the sustainability of our banking system in our house of cards style of economy .
- Finally, life is very expensive right now. Many people struggle with basic costs of living. Thinking about retirement or other long-term goals is hardly on the radar for a good percentage of the population
I could write a detailed article on every single one of these points (but I’ll spare you the lengthy economic analysis). The point is that savings/investment conventional wisdom is outdated. It worked great if you started earning in the 1960s but times and conditions have changed. And thus our thinking on savings needs to change as well.
I’m not arrogant enough to pretend there’s an easy solution for the masses. Everyone is different and has different current situations and different goals.
For me personally, I have chosen to do four things…
- Stay up to date on economics. We live in unstable economic times and so it’s crucially important to stay aware of what’s going on. Our leaders and the various investment institutions have their own short term interests at heart. So I have taught myself advanced economics and good financial management. I have stayed flexible with my financials and aware of actions I may need to take in the future
- Rather than save money, I have chosen to invest money in myself. My business is my savings vehicle. My skills are what generates income. I am choosing to diversify all of the above. I have several business ideas to make sure I’m covered in the best and worst of times. Investing in myself and my assets is a better choice than praying all the savings assumptions that worked in the past will continue to hold true.
- Diversifying countries. Just because a country has created prosperity before doesn’t mean it will in the future. I was born in the US. We are taught it’s the land of opportunity and the biggest economy in the world. That may be true today but is not necessarily true tomorrow. Our country has been financially mismanaged and has unsustainable debt in the household and government sectors. That will cause significant pain someday. Our health care system and higher education system is a financial disaster. Infrastructure is crumbling. Good policy and good infrastructure is what creates opportunity. Since I am uncertain that my country will offer this in my future, I am diversifying to countries that offer alternatives… Australia, China, Southeast Asia, Eastern Europe. These countries are far from perfect but by diversifying I can try to get the best of every world.
- Continually refine my approach. Making a 50 year plan is silly. We can hardly predict what will happen next week. So it’s important to stay current with the news, with modern skills, with technology, and with the world. I remain flexible in thought and free of constraints. This way I can adapt no matter what happens. The one constant is to always be prepared for bad times and have at least a year’s savings on hand.
So the one main point I’d like to make in this article… Think about yourself! What do you want to achieve? How can you best do it? Instead of blindly following outdated conventional wisdom, try to think with greater creativity. That way you’re prepared no matter what the world has in store for us.
About the author: Reverse Tide is the internet’s top site for combining education, career, and lifestyle and then enhancing them collectively. You can find resources, perspectives, online courses and more