Millennials: Don't Let An Oversized Rainy Day Fund Keep You From Investing
It may be prudent to save up just in case you run into a tough 6 months, but it's also smart to start investing for the long term as soon as possible.
Here's a story I've heard told in many variations over the past few years. In one, there are twin brothers -- let's call them Charles and George -- who each get jobs at 22 at the same company for the same salary. They are immediately faced with the decision of whether or not to start tossing money into their retirement funds. Charles elects to make a 5% salary contribution to his 401k. George elects to stick all his extra cash in a rainy day savings account in case things go awry.
Ten years later, George realizes he's way behind on his retirement and starts contributing the same 5% as Charles. When the brothers reach retirement age, Charles has been contributing to his 401k for roughly 40 years, George for about thirty. That ten-year gap doesn't seem like much on the surface but because of the way compounding interest works, Charles will have saved over twice as much money as his brother.
The moral of this story, aside from teaching a way to show up your brother, is that young people need to take advantage of the distance in years between the present and the point in the future at which you'll need to start drawing from your retirement account. It may feel prudent to amass a weighty rainy day fund lest you lose your job at 25 but the long-term cost of that prudence could be the difference between living comfortably and living uncomfortably when 2055 roles around.
The importance of saving for the long term versus saving for the short term is one of several tips offered up by Forbes contributor Alexandra Talty in a piece up on that site right now. Be sure to check it out if you're a fellow millennial in need of a rough crash course on savings and investments. Let us know in the comments if you have a different take on the issue.
Read more at Forbes
Photo credit: Andrey_Popov / Shutterstock
For more on millennial issues, check out the following video featuring Pew Research's Paul Taylor:
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