How Gen-Z and Millennials Will Win with Money
Despite some very bleak investment forecasts
Young people today have a smaller margin for error with money than Boomers did.
Credit Suisse’s 2021 report on global investment returns paints a bleak picture for the investment prospects of young people today;
Young investors today can expect to earn less than half the annual return that baby boomers enjoyed during their careers.
Yes, you heard that right.
Why?
Because when interest rates are low, expected future returns of stocks and bonds are low. And we are at record low levels of interest rates.
We could be entering a low-return world
That might be shocking for some people to imagine because stocks and bonds have been on a 10-year bull market. But that’s part of the problem. After extended periods of higher-than-normal returns, it’s not uncommon to enter a period of lower than expected returns.
In their report, Credit Sussie broke down past investment returns enjoyed by past generations.
Baby boomers: Includes annual returns since 1950.
Gex X: Includes annual returns since 1970.
Millennials: Includes annual returns since 1990.
Gen Z: This shows the expected investment returns moving forward.
The startling trend you’ll notice is that each successive generation earns a lower inflation-adjusted return on investments in the stock market than the previous generation.
We see the opposite trend when we examine the real return on investments in bonds by each generation.
This is not a coincidence. As interest rates fall—as they have for the past 30 years— bond prices increase. However, interest rates can only fall so far (theoretically), which means that young people today can’t rely on the steller bond returns enjoyed by previous generations.
The expected real return on future investments in bonds is negative. Meaning anyone investing in bonds today would expect to lose money after accounting for inflation.
A dollar saved ain’t what it used to be
Lower expected returns mean that young people’s savings won’t go as far as they did in previous generations.
After accounting for inflation, a baby boomer who invested $500 per month in the stock market for 30 years would have $622,159.
A young person who started investing $500 per month in the stock market for the next 30 years might expect $291,368.
How young people can still win with money
Young people today are going to need to work a lot harder, smarter, and potentially longer to enjoy the same standard of living as past generations.
If annual investment returns are expected to be lower going forward, young people today will have to do some combination of the following:
Invest in their human capital to maximize their earning potential.
Save a higher percentage of their income.
Retire at a later date than past generations.
Avoid taking unnecessary risks in their portfolios.
If investment returns are low, invest in your greatest asset; yourself
If stock and bond returns are expected to be low, the number one thing young people can do to overcome that hurdle is to invest in their “human capital,” aka their income potential.
I’ve been writing about the importance of human capital a lot lately because maximizing your earning potential is the easiest way to increase your margin of error in your finances.
Over the past 10 years, I have focused on increasing and diversifying my human capital in two ways.
Certification: A signal to employers that you are qualified for high-paying jobs. I went the “formal” route by getting a bachelor’s and master’s degree. However, it’s not the only route. Trade schools, certificate programs, and technical industry training are all viable ways to obtain certification.
Side hustles: I’ve had a side hustle most of my adult life as it not only increases my earning power but it diversifies my income streams.
Making more money does not guarantee success
Making more money does not guarantee financial success. Only saving a high percentage of your income can do that.
Increasing your savings rate has two massive impacts on your financial security.
It keeps your living expenses in check: The lower your living expenses, the less money you’ll need to save for retirement.
It allows you to quickly increase your net worth.
There are only two ways you can increase your savings rate:
Reduce your spending while maintaining your current income.
Increase your income while maintaining your current spending.
If you want a more in-depth article on increasing your savings rate, I would recommend this article.
Find work you love and own your income
If you’re struggling to make more money and increase your savings rate, you may need to work longer than past generations. Which isn’t a problem if you find work that you love.
If companies aren’t lining up to give you your dream job, go create it.
Over the past three years, I have been building a profitable side business that I love. If it were my only source of income, I would be stressed, but as a secondary source of income to complement my day job, it’s amazing.
The real key is that my side business provides scalable income: I am not guaranteed to earn a cent, but my earning potential is uncapped. That makes it a perfect side business.
If the side business continues to scale, in a few years, it could become my “main hustle,” and it’s something I love and would be happy working on into my golden years if possible.
Don’t take unnecessary risk
Young people can’t afford to take unnecessary risks with their investments.
That means;
Diversifying: Don’t pick individual stocks.
Holding: Don’t try and “time the market.”
Minimizing fees: Don’t pay higher investment fees than necessary.
There is no doubt that young people today have an uphill financial battle on their hands. But that there is also a lot of reason for optimism. Young people today have digital savviness and entrepreneurial spirit.
If you’re a young person reading this and you’re worried about your financial future, my message is simple: Invest in yourself, save as much as you can, find work that you love, and you’ll have a recipe for a fantastic life.
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This article is for informational and entertainment purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
Ben, I always like all your articles <3
So utterly repulsive