The Ramsey Show: Gen Z Is Making a ‘Huge Financial Mistake’ — Here’s How To Fix It

Worried teenage girl using mobile phone in her room.
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In a recent episode of the popular personal finance podcast The Ramsey Show, the hosts discussed a story from Yahoo Finance about the saving habits of Gen Z. The story, based on the annual State of Retirement Planning published by Fidelity Investments, covered the surprising findings that over half of Gen Z put their savings on hold during the COVID-19 pandemic — and that half still feel there’s no point in saving until things return to “normal.”

The hosts characterized that mindset as a big mistake. In Gen Z’s defense, there are plenty of reasons to be uncertain — stubborn inflation, an up and down stock market and geopolitical unrest all add up to a volatile and uncertain economic outlook. It’s no wonder young people are leaning towards holding their savings in cash, if they’re saving at all.

There’s Never a ‘Perfect’ Time To Save

That word “normal” is something the hosts immediately keyed in on, making an important point — there’s no such thing as the ideal time to save. Aside from a very lucky few, you won’t find yourself in the perfect job at the perfect company with the perfect economic conditions, and if you’re waiting for that ideal state to start getting serious about saving, you’re losing valuable time and potentially jeopardizing your financial future.

The truth is, there is no such thing as the perfect time to start. Financial planning and investment are long-term endeavors, and timing the market perfectly is virtually impossible. Market fluctuations are a natural part of the financial landscape, and they can be unpredictable.

Make Your Money Work for You

Time Is Your Friend

Gen Z isn’t the first generation forced to navigate a deeply uncertain future. Robert Johnson, professor of finance at Creighton University’s Heider College of Business, noted similarities between younger generations and the World War II generation: that is, low allocations to equities and unusually high allocations to cash. This is one of the key reasons why the Gen Z mindset towards saving is a mistake — the longer your time horizon, the better off you will be.

“There are two elements for successful retirement planning that there are no substitutes for — time and consistency,” Johnson said. “The sooner one starts saving for retirement, the more successful they will be. If one starts saving for retirement at age 25, one needs to invest substantially less than one needs starting at age 35.”

Don’t Just Save, Invest

The reason starting early is so important is that it allows more time for compounding to take place. Compounding is the process of reinvesting your earnings into assets that will also generate earnings — essentially, you’re earning interest on your interest.

“According to data compiled by Ibbotson Associates, large capitalization stocks — think S&P 500 — returned 10.1% compounded annually from 1926-2022,” Johnson said. “Over that same time period, long-term government bonds returned 5.2% annually and T-bills returned 3.2% annually. The surest way to build wealth over long time horizons is to invest in a diversified portfolio of common stocks.”

It’s OK To Invest in Yourself

Another interesting finding about Gen Z is that some noted a desire not to avoid saving, but to use those savings to invest in themselves. That’s a great idea, as long as you aren’t doing so at the expense of your financial future.

Make Your Money Work for You

Doing something that can pay off for you, like furthering your education or starting a business, can be a great idea, but you should do everything you can to avoid dipping into your retirement savings to pay for it — or putting yourself in a position where you’re unable to save.

Get Comfortable With Being Uncomfortable

It’s impossible to over-emphasize that there is no ideal time to start saving. In order to build the wealth you’ll need to achieve your financial goals, you’ll have to have the fortitude to keep saving, and investing, in both good times and bad. On top of that, you’ll have to handle taking on some risk, because that’s the only way you can get the returns you’ll need.

“There is an old Wall Street adage that states, ‘You can sleep well or eat well,'” Johnson said. “You will sleep well if you commit funds to low-risk investments like money market funds or Treasury bills, but your investments will not grow substantially and may even have trouble keeping pace with inflation. You will eat well by consistently investing in stocks.”

Seek Professional Guidance

Regardless of what generation you’re a part of, if you find it challenging to manage your finances or need assistance with debt reduction and investment strategies, consider seeking advice from a financial advisor or counselor. They can help you create a personalized financial plan tailored to your goals and financial situation.

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