The Stupid Investing Mistake Most Millennials Make — And How To Avoid It

The Stupid Investing Mistake Most Millennials Make — And How To Avoid It View Apart /

Don't wait to start building wealth. Every year you're investing counts, and the younger you start, the better off you'll be.

Hey, you! Young American between the ages of 22 and 38! Put down that avocado toast and listen up!

You’ve probably had a busy day of killing various things, like napkins or fabric softener or capitalism. But this is important. You might be in the process of killing the one thing you absolutely can’t afford to lose — your future. You’re probably doing it without even realizing it, but there’s still a chance to salvage your situation, if you get started ASAP.

A recent study from the National Institute on Retirement Security, published earlier this year, found that 95% (!) of millennials aren’t saving enough for retirement. Two-thirds of millennials haven’t saved anything at all.

Times have changed

This isn’t necessarily because millennials are spending frivolously on all those things that the commentariat loves to smirk about (like avocado toast). Fewer millennials (55%) are eligible to participate in employer-sponsored retirement plans than either their older Generation X (77%) or Baby Boomer (80%) workforce peers. When the option’s available, millennials actually participate in employer-sponsored retirement plans at rates that roughly equal those of older generations.

The obvious difference in employer-based retirement plan availability can be explained by one simple statistic — a quarter of the millennial workforce works in a part-time job, compared to less than 15% of either Generation X or Boomer workers.

Nearly a quarter of millennials also have less than a year of tenure at their current jobs, which may also keep them from accessing employer-sponsored plans.

Are these good reasons to avoid investing in your future?

Absolutely not.

Every year you dither and delay costs you more down the road. If you start saving at age 22, it’s a lot easier to build a nest egg than it is when you start saving at 42.

It adds up quickly

A 22 year-old who saves a mere $50 a month can retire with $330,000 at age 65. It’s not enough to retire on, but it’s worth keeping in mind that income tends to rise as you gain experience. A 24 year-old who can save $100 a month will end up with a nest egg of $550,000 at age 65.

These numbers are based on a simple calculation that assumes 3% inflation and a 9% average annual gain in your investment, which is lower than the average annual return for the S&P 500 over the three most recent 30-year periods.

A 27 year-old who saves $200 a month can build a portfolio worth $830,000 by the time they retire at 65. Someone who starts saving $200 a month at age 30 only winds up with $630,000 at age 65. Waiting three years to start building wealth under the exact same strategy could cost you $200,000!

On the other hand, starting early confers enormous benefits on your future financial health, thanks to the power of compound interest. A 22 year-old who saves $100 a month until retirement at age 65 winds up with a near million-dollar portfolio — $990,000, to be exact. Starting this $100-per-month investing strategy at age 25 instead shaves $240,000 off your future portfolio value.

Warren Buffett provides the ultimate example of this principle at work. He started with roughly $20,000 at age 21, became a millionaire at 30, surpassed a billion-dollar net worth at age 56, and continued to enjoy explosive growth in the value of the assets under Berkshire Hathaway’s control well into his 80s.

From age 56 to age 60, Buffett’s net worth nearly quadrupled, to $3.8 billion, and from 60 to 66 it more than quadrupled, to $16.5 billion. Today, Warren Buffett is consistently one of the five richest men in the world, but it would never have been possible if he hadn’t started early and worked consistently to increase the value of his portfolio — which in this particular instance is the value of holding company Berkshire Hathaway, rather than a 401(k), an investment mechanism that didn’t exist when Buffett got started.

The Bottom Line

Starting early works, even if you don’t start with a whole lot of money. $100 a month, after all, is less than the cost of most cable packages, or the expense of having one brunch outing per week, or the price of a nice yearly seven-day all-inclusive cruise that’ll probably give you an intestinal bug anyway. Millennials are supposed to be killing all of those things at any rate, so they can’t be too hard to miss once the money is reallocated away from them and towards a more comfortable retirement.

You won’t even have to give up the avocado toast. An avocado and a couple of slices of bread generally costs less than a Starbucks latte, and it’s a lot healthier to boot.

Alex Planes

Alex Planes is a seasoned writer with over 3,000 published articles on money and personal finance. His work has been featured or syndicated by The Motley Fool, Business Insider, Fox Business, and USA Today, among others.