Monday, 22 October 2018

First the good news: both Gen Y (a.k.a. millennials) and Gen Z are saving money. The not-so-good news is they aren't necessarily making the best choices about what to do with their savings.

Millennials, those ages 23 through 37, have long been stereotyped as spenders. However, recent data shows Millennials are saving money. According to the 2018 Better Money Habits Millennial Report, 63 percent of Millennials are saving money, and 47 percent have saved $15,000 or more.

Generation Z, people ages 14 to 21, have taken the “start saving early" advice to heart and are establishing themselves as a saving generation. According to a study by Ernst and Young, 57 percent of Gen Z responders said they prefer to save money than spend it immediately. In a survey by Lincoln Financial, more than half of the 400 respondents said they have a savings account, and 71 percent said saving money was a top priority.

While these trends are certainly positive, both generations seem to be falling short when it comes to maximizing their savings. For example, Millennials who experienced the Great Recession are shunning the stock market and keeping much of their savings in cash.

Because Gen Z is so comfortable with technology, they often leave balances in their digital payment platform accounts, which typically do not pay interest. What's more, because these payment services aren't banks, funds aren't protected by the Federal Deposit Insurance Corporation (FDIC).

Again, the good news is the younger generations are saving — and saving early. Here are some tips to help Gen Y and Z better understand the differences between saving and investing.

1. Improve financial literacy

The results of many surveys seem to indicate both generations could benefit from a better understanding of financial products and how they work.

For example, according to a TD Ameritrade Gen Z survey, nearly half of those surveyed said they believed a savings account is the best way to save for retirement, and only 17 percent said investing in the stock market is the best way to save for their golden years.

Similarly, according to a bankrate.com survey, Millennials prefer to keep their savings in CDs and money market accounts. While cash savings are important, understanding what your options are as your savings grow can be financially beneficial.

According to a survey by the Center for Generational Kinetics, nearly half of Gen Z and roughly 30 percent of Millennials haven't been in a bank in the last month. Both these groups are more inclined to get their financial information online. And while the Internet can be a source for valuable financial insight, incorrect or misleading information is also plentiful.

What's more, because every financial situation is different, at some point it can make sense to seek out the advice of a financial professional to develop a comprehensive long-term savings plan.

2. Get to know IRAs

Pensions are pretty much a thing of the past. And according to a 2018 Pew survey, more than one-third of private sector workers don't have access to an employer-sponsored retirement plan. With the rise of the gig economy, chances are fewer and fewer workers will participate in employer-sponsored plans.

But Gen Y and Z still have access to tax-advantaged retirement savings plans. Traditional and Roth Individual Retirement Accounts, or IRAs, are designed to provide an option to employer-sponsored plans.

With Traditional IRAs, pre-tax money is contributed and grows on a tax-deferred basis, which means gains will be taxed when the owner begins making withdrawals during retirement. Post-tax funds are contributed to Roth IRAs and grow tax free, which means withdrawals made during retirement will not be taxed. Both accounts are subject to annual contribution limits and early-withdrawal penalties.

Traditional and Roth IRAs offer valuable ways to save for retirement and with a little help from a financial professional, even those without access to employer-sponsored plans can save smarter for the future.

3. Embrace investing

Many younger people are just trying to make ends meet and don't believe they have enough money to invest. Many also fear the risk associated with investing.

Truth is, the younger an investor is, the more risk they can handle. The reasoning behind this is younger investors have longer to save and therefore a few setbacks won't throw them completely off course. This is precisely why Gen Y and Z should consider investing in the stock market.

But how do individuals invest in the stock market? Two words: mutual funds. Mutual funds are professionally managed investment programs that use funds from a large group of shareholders to purchase equities.

These investment vehicles allow more people — particularly those with smaller amounts to invest and no market expertise — to invest in the stock market.

Mutual funds are available through financial institutions and brokers. To avoid having earnings eaten up by fees, small or beginner investors should look for funds with limited transaction costs.

Do-it-yourself investing can be another way to minimize fees. And while there are online tools designed to help DIY investors, it's probably wise for small and beginner investors to leave the trading to the pros.

When it comes to finding extra money in the budget each month to invest, many financial experts suggest automatic investing, or having an affordable amount of money transferred automatically to an investment account each month.

As the investor's career advances, and ideally their salary increases as well, bumping up the amount transferred each month is a painless way to invest even more. 

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