A recent study has revealed that the millennial generation is doing an outrageously dangerous thing with the money they earn. And the habit they have will stun you.
UBS recently released its Investor Watch, its quarterly effort to better understand investors and their preferences and habits. The study focused on the millennials -- those between 21 and 36 -- and how their money habits and thoughts related to the other generations of Americans.
Although many people believe the younger generation to be one marked by laziness, materialism, or countless other negative things, it turns out the perception of the generation doesn't match the reality. In fact, the study itself noted: "Think you know the Next Gen investor? Think again."
The survey from UBS painted a dramatically different picture from what many people think surrounding the youngest generation. These individuals "are extremely conservative, savers not investors, and not nearly as self-directed as one would expect."
The study went on to suggest the habits of millennials more closely resemble the World War II generation -- those 68 and older whose younger years were perhaps in the midst of the Great Depression or the World War -- than others. This was the result of the two major recessions during their formative years, which hurt not only their own investing and job prospects, but their parents as well.
Yet the conservative nature extended beyond simply money habits, as the millennials were "the most worried of all generations," and they "have a broad perspective, including concerns about their retirement and their parents, which directly contradicts the 'entitled, short-term focused' stereotype."
These findings clearly show that the common perception surrounding the millennial generation is simply incorrect. However, there is one result of these habits that is truly dangerous.
The scary habit
The survey found millennials hold 52% of their wealth in cash and just 28% in stocks, whereas all other generations hold just 23% in cash and 46% in stocks, as the following chart shows.
Only 28% of millennials considered long-term investing to be a key to achieving success, versus 52% of the non-millennials.
While financials markets have been full of ups and downs during their formative years, this habit is the exact opposite of what millennials should be doing to allow themselves to achieve financial freedom.
Put simply, the younger an individual is, the more risk tolerance that person should have, and the more willing he or she should be to put money into the stock market.
A powerful example
Consider for a moment two 25-year-olds, Mary and Larry, who committed to saving. Mary saved $100 each and every month into an S&P 500 index fund -- something billionaire Warren Buffett even suggests is a great solution -- with an average return of annual 7.5%. Larry put $500 per month into his bank account and earned 0.25% on the savings. And let's say this lasted for 45 years, until they were 70.
Have any idea who would have more? Despite stashing away five times less than Larry, Mary would have 56% more money than Larry after 45 years. She would've turned $55,000 into $429,000, whereas Larry would find himself with $292,000 after stashing away $275,000 in his savings account.
If you get ambitious and say Mary is able to save 5% more each year -- so she saves $1,260 in year two -- she ends up with $880,000 on $200,000 worth of savings. Put differently, she'd have three times more despite putting away more than $100,000 less.
If you get ambitious and say she can save 7.5% more each year, her total account jumps to $1.4 million by the time she's 70.
Investing can seem scary, and the past 10 years have been a difficult time to stomach the ups and downs of the stock market, but not saving and investing can be far more treacherous.
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