A 2016 survey from Bankrate uncovered some surprising beliefs that millennials have about money. It turns out millennials are obsessed with cash. And not in a greedy or a good way.
The survey asked participants for the best way to invest money that wouldn’t be needed for more than 10 years. Here are the results from all adults who took the survey:
The majority of Americans think cash is one of the best places to invest money over a period of 10 years or more. Going even deeper into the data, this is what the survey found:
“Millennials were the generation most likely by far to value cash investments above the others, with 32% of those between ages 18 and 35 endorsing cash, including a whopping 43% of younger millennials ages 18-25.”
As I said, millennials are obsessed with cash. And that’s a big problem. Why, you ask? Read on.
Reason #1: Cash loses value over time
I get the appeal of cash. Particularly if you grew up through the dot-com bubble or the Great Recession and saw people panicking and struggling to meet ends meet when the economy took a serious turn for the worse. Having cold, hard cash in the bank can feel like a safe place to invest your money, but it’s actually one of the riskiest long-term investments you can make.
Cash loses value over time. A $100 bill will, on average, buy less stuff 10 or 20 years from now than it will be able to purchase today. This is all thanks to inflation. Between 1914 and 2017, inflation averaged about 3.3% each year. Put in other words, your cash will (on average) be able to purchase 3.3% less stuff than it did the year before.
On the surface, 3.3% might not sound like a huge number. But at that average pace of inflation, your purchasing power will be cut in half almost every 20 years. What costs $100 today would cost about $200 in 20 years. You would need to double your cash savings just to be able to buy the same stuff two decades from now.
This is why simply holding your cash is far riskier than it sounds. With people living longer than ever — and spending more money on things like healthcare and education — sitting on cash as a long-term investment will mean you end up with less purchasing power down the road. That is risky.
Reason #2: Interest rates won’t get you very far
Let’s say you’re doing more than just putting your cash in a piggy bank and letting time ravage away at your purchasing power. Instead, you put your money in a savings account or a Certificate of Deposit (CD) and start earning interest. True, either of those would be better than the piggy bank. But not by much.
In all of U.S. history, interest rates have averaged about 5% per year (as this chart from CNBC shows):
And, yet, somehow cash is still the favorite long-term investment among millennials. Relying on interest rates as an investment is not a recipe for long-term success. Either millennials will have to work more (and longer) and save the majority of their income throughout the rest of their lives, or they need to find a better investment alternative.
Which brings us to the third reason to stay away from cash as an investment…
Reason #3: There are better investment alternatives
Stocks sound risky. Anyone who was aware of (or experienced) the stock market’s steep decline through the Great Recession will understandably be more cautious about investing in stocks (which I would guess is part of the reason millennials have such a strong tendency to stick with cash).
However, what makes stocks risky as an investment aren’t the stocks themselves. Buying stocks and only holding them for a few weeks or months — having a short-term time horizon — is when it becomes more like flipping a coin (gambling) than investing. The risk for investors is the short holding period, not the stock market itself.
Data shows that the longer you hold stocks, the higher the probability you will make money. Research from Betterment looked at the S&P 500 — an index that tracks 500 of the largest U.S. companies — and how it historically performed based on the amount of time it was held.
The longer the holding period, the lower the probability of losing money.
A similar study by financial columnist Morgan Housel found that there has been no 20-year period where you would have lost money in the stock market (including the negative impact of inflation). And remember, this data takes into account all periods, including the Great Depression and Great Recession. Stocks are rewarding so long as you are patient and able to hold them for 10 years or longer.
The stock market becomes less risky and more rewarding the longer you are able to hold. Cash becomes less valuable (and riskier) the longer you hold. This is why millennials have a golden opportunity right in front of them, since they are in a position where they can buy and hold stocks for decades.
For a long-term investment — where you have 10 or more years to invest — picking the stock market over cash is a no-brainer. Here are four simple steps to start investing in stocks today.
Getting better with money
With all that said, don’t go burning your dollar bills. There is a place for cash in your life. Having a safety net of cash in the bank — three months’ worth of expenses is a good rule of thumb — will help you sleep at night and better handle the curveballs that life inevitably throws at us.
The bank is a good place to keep cash that you might need to access anytime within the next year or so. Longer-term investments — money that you won’t need for at least five years — should go into investment vehicles like the stock market.
If you’re a millennial, you have the biggest advantage of all when it comes to investing: time. Don’t squander it by investing solely in cash.
Originally published on The Vantage
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