There was a time when young, unskilled workers could buy houses and start raising families right out of high school if they worked hard and saved their pennies.
Those days are long over.
Their Impact on Money: Gen Z: The Future of Finances
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“The cost of living has increased dramatically over the past couple of years, and it is only expected to become more difficult in the near future, making financial independence and homeownership more impossible for Gen Z than any generation before them,” said Carter Seuthe, CEO of Credit Summit. “The houses that baby boomers bought for $50,000 at age 20 are now valued over $1 million. Combine that with the astronomical cost of higher education, the ability for most Gen Zers to own a home in the near future is extremely limited. So, they have to start making smart, impactful money moves ASAP.”
It’s not just homeownership and college. Gen Z aspires to entrepreneurialism, innovation and social change — none of which are possible without resources. The easiest way to amass those resources — the only way, for many in today’s economy — is for the youngest adults to shake off their skepticism of the financial industry and invest their money, no matter how little they have.
Gen Z’s Lofty Goals Will Go Unrealized Unless They Invest
Speaker, author, marketer and Rutgers University professor Mark Beal specializes in Gen Z, which he calls the “Purpose Generation.” Beal conducted a survey of Gen Zers across America in September.
“Nearly a quarter — 23% — consider themselves entrepreneurs,” Beal said.
Entrepreneurialism requires ambition, perseverance, grit — and money.
“Saving and investing will serve as one way to contribute to successfully launching and sustaining their aspirations for startup companies and nonprofit organizations,” said Beal.
Even if they’re not entrepreneurs, Gen Zers will find that their preferred lifestyle is mostly out of reach on income alone.
“First, you want to live an insanely awesome life,” said Bill Schultheis, financial author co-founder of Soundmark Wealth Management. “So, invest in low-cost, low-maintenance index funds, ignore the market and focus instead on your passions, purpose and profession — you know, the stuff you can control. You’ll make more money in the long run and avoid the crazy stress of trying to stay ahead of the latest crypto, Robinhood and meme stock news.”
Only Investing Can Unleash the Power of Compound Interest
With today’s measly yields, cash socked away in traditional savings accounts actually loses money to inflation. But thanks to the wealth-generating magic of compound interest, just about anyone can build a small fortune, provided they possess the one thing Gen Z has in spades — time.
“Assume you invest $1,000 and earn 10% each year for the next 10 years,” said Tyson Stevens, founder of the education resource EduRef. “With simple interest, you’d earn $100 per year for 10 years and finish up with $2,000 at the end. Compound interest, on the other hand, allows you to earn interest on interest. With compound interest, your portfolio would be worth $2,593.74 after 10 years, or over 30% higher.”
Here’s what happens when you extend your time horizon and keep adding whatever you can along the way.
“Let’s make things a little more challenging by assuming you put $1,000 into a 10%-per-year investment and then add another $100 each month,” said Stevens. “If you begin investing at the age of 20 and retire at the age of 65, you will have invested and compounded for 45 years. Your entire investment would be $55,000 during that time period, consisting of your initial $1,000 plus 45 years of monthly increases of $100. However, your overall worth will have increased to $935,575.29. That’s right. If you start with $1,000 and earn 10% a year on your assets, adding $100 per month can get you to just under $1 million by the age of 65.”
Again, the key ingredient is time, not money. Here’s what happens if young investors squander their most valuable asset.
“If you invested just $50 a month starting at 20 until you are 65, at just a 5% return per year, you’d have around $96,000 by the time you’re 65,” said Dustyn Ferguson, founder of the personal finance blog Dime Will Tell. “If, however, you wait until you are 30 to start, you’d end up with only $54,000. Nearly half of a return just by starting 10 years later.”
For Gen Z, There’s Just No Excuse Not To Invest
Gen Z is the first generation in history that can access the market with the unimpressive sums of money that are common to 19- or 20-year-olds.
“Despite what some may think, investing is not for the rich,” said Kelly Lannan, vice president of Young Investors at Fidelity Investments.
Not only have brokerages dropped the fees that always kept small-time investors out of the market, but you no longer have to save up until you can afford an entire share.
“Until quite recently, buying a stock meant that you had to pay at least the price of a full share to own it,” said Olivia Tan, personal finance coach and founder of CocoFax. “That made buying stocks like Amazon cost-prohibitive. Now, investors can buy fractional shares of stock, meaning if you only have $100 to invest, you can still buy Amazon — you’d just own some fraction of the shares. But when investing in the stock market, the share count doesn’t matter. If Amazon were to trade up 25%, you’d still earn a 25% return on your money, even if you only owned some fraction of the shares.”
In fact, many of the free investing apps with no fees and partial-share trading were specifically designed for young beginners. Even if Gen Z outgrows them one day, they’re a great place to get started right now.
“While Robinhood and Acorns aren’t the most efficient method of investing and often have modest returns, they are easy to use and let people start seeing compound interest at work,” said Jeffrey Zhou, co-founder and CEO of Fig Loans. “Once they’re more comfortable with the concept, you can guide them to more aggressive forms of investing, like working with a financial advisor or getting an account with a larger institution, so they can really put their money to work.”
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Last updated: Oct. 25, 2021