Why should millennials turn savings into investments?

Find the best way to grow your money more

 

Being a millennial, you are at a crucial stage in your financial journey. While saving your money is important, investing takes it a step further. With the power of compounding, you can make your money grow relatively faster and make it work harder for you.

 

If you are thinking, why turn your savings into investing is a more efficient way of securing your future, check out these three compelling reasons:

Millennial financial planning overview

Millennials, born between 1981 and 1996, have experienced the shaping of the financial landscape through economic uncertainties like rising living costs, student debts, and tech advancements. While this generation is known for its tech-savviness and social consciousness, it has also significantly faced challenges like delayed homeownership and retirement savings.

 

Millennial financial planning means the process of managing money with the focus on present and future goals. Prioritizing it is essential for millennials to be stable and financially independent. For example, millennials can budget their income and expenses to balance their daily needs and future goals. One approach, such as the 50/30/20 rule, can help them allocate 50% of their income for essentials, 30% for wants, and 20% for savings or investments. By being disciplined in such budgeting and investing, millennials can build a strong financial foundation and make sure they are ready for life’s unexpected expenses.

Savings vs investments for millennials

Although both savings and investments are crucial for millennials, it’s important to note that they serve different purposes. Savings are ideal for short-term financial goals. On the other hand, investments offer the opportunity to build wealth and prepare for long-term financial goals.

 

While savings provide security, they often offer limited growth due to inflation. However, investing can outpace it and help you achieve greater financial stability in the long run. Striking the right balance can help millennials address their immediate financial needs while building a wealth-generating strategy for the future.

Why millennials should move beyond just saving

While saving money is an important step toward financial stability, millennials must move beyond traditional savings to build long-term wealth. Here's why:

• Limitations of traditional savings: Traditional savings accounts often offer low-interest rates that don’t keep up with inflation. Over time, this means your money loses value rather than growing.
• Opportunity cost of keeping money idle: When money sits idle in a savings account without earning much, you miss the opportunity to invest it in assets that can generate higher returns, such as stocks, bonds, or real estate. This opportunity cost can limit your wealth-building potential.
• Difference between saving for short-term vs planning long-term: Saving is typically aimed at short-term goals, such as building an emergency fund or making a big purchase. However, for long-term goals like retirement or financial independence, simply saving is not enough. You need to make your money work for you by investing.

 

Mindset shift from saving to growing money: Millennials need to shift their mindset from just saving money to actively growing it. By learning how to invest and understand the power of compounding, millennials can grow their wealth over time, securing a better financial future and achieving long-term goals.

How compounding interest helps millennials grow wealth?

This is perhaps the biggest reason why you should be investing as early as now. To illustrate compounding interest, suppose you place P10,000 in an investment fund that earns 2.5% every year. At the end of year 1, you will earn P250.

 

Because of compounding interest, you will earn another P256.25 the next year (P10,250 x 2.5% interest). Year 3? Your money will be P10,768.91. And it just gets bigger and bigger over time. The best part? Just imagine if the interest rate on the investment fund was higher than 2.5%. But to fully maximize compounding interest, you need time. Lots of it.

 

So, let’s say you start investing in your mid 20s. Because your money had time to earn interest, you will have more than someone who started investing at age 40.
Did you know that certain investments also offer cash payouts? So, not only are you growing your savings, but you are given extra cash to spend for whatever you have in mind – travelling, gadgets, or funds for a hobby or passion.

How inflation impacts millennial savings

Inflation is a sustained increase in the general price of goods and services. This constant increase in prices means a decrease in the purchasing power of money. So, your P10,000 today will not be worth P10,000 5 years from now. For example, if you could buy 4 bags worth of groceries with your P10,000 today, in five years, your P10,000 might only be able to let you buy 3 bags worth of groceries.

 

If you place your P10,000 in a savings account, the interest you earn is so small that it will not be enough to cover the rising costs due to inflation.

 

On the other hand, if you place your P10,000 in investments, you can take advantage of much, much higher interest rates, more than enough to beat inflation.

Have an emergency fund

It’s always wise to set aside around 3-6 months’ worth of your salary should anything unfortunate or unplanned happen, such as a natural disaster, a major house renovation, a sudden illness in the family, or loss of employment.

 

Having an emergency fund means you don’t have to borrow money and be in debt, and it provides you with some peace of mind.

Early retirement

If the idea of investing is to grow your money at a much faster rate, then you should be able to fulfill your life goals much faster. Depending on the amount and kind of investments you have, you may find yourself enjoying life more and working less before you hit your 40s or 50s.

 

If you don’t take advantage of compounding interest and the high returns of investing now, it may take you a much longer time to save up for a comfortable life. Manulife Philippines has affordable investment and life insurance plans that provide life insurance coverage while optimizing potential returns for your investment. If you want to know more, contact us today.

 

Investment tips for millennials planning their future

As millennials start to plan for their financial future, here are some key investment tips that can help pave the way for long-term success:

• Start small but stay consistent: You don’t need a lot of money to begin investing. Start with small amounts and keep contributing regularly to build your wealth over time.
• Diversify your investments: Spread your investments across different areas like stocks, bonds, and real estate to reduce risk and increase your chances of steady returns.
• Think about long-term, not short-term: Focus on long-term growth rather than quick profits. The market will have its ups and downs, but with patience, you’ll see better returns over time.
• Get professional advice: It’s smart to seek guidance from a financial advisor. They can help you create an investment strategy tailored to your needs and goals.
• Align your investments with your goals: Make sure your investments support your life goals, whether it’s buying a home, saving for retirement, or funding future education.

Conclusion

For millennials, financial planning is more than just saving money—it’s about making smart decisions that will set you up for long-term success. Budgeting for millennials is crucial in managing your income, prioritizing expenses, and ensuring you have enough for both short-term needs and future investments. Transitioning from saving to investing is the next step in building wealth. While savings provide security, investments offer the potential for growth. By starting small, diversifying, and maintaining a long-term mindset, millennials can set themselves on a path to financial independence and a secure future.

Key takeaways

• Investing helps your money grow faster than traditional savings, thanks to the power of compounding.
• Millennials who invest early can take advantage of long-term growth and secure financial independence.
• Savings alone may not be enough due to inflation, making investing crucial to maintaining purchasing power.
• Financial planning for millennials includes building a strong investment strategy to meet both short- and long-term goals.
• Investing allows for financial flexibility and the possibility of early retirement, providing more control over your future.

Frequently asked questions

1. Is it risky for millennials to start investing early?

Starting early can feel risky, but the benefits of compounding make it a smart decision. The key is to start with a long-term mindset and choose investments that align with your risk tolerance.

2. How can millennials balance lifestyle spending and investing?

Millennials can balance this by budgeting effectively. They can allocate a portion of their income to both lifestyle spending and investments. Prioritizing needs over wants and setting clear financial goals will help maintain this balance.

3. Should millennials invest even with low income?

Yes! Even with low income, starting small with regular investments can help millennials grow their wealth over time. The earlier they start, the more they can benefit from compounding interest.

4. What common financial mistakes do millennials make?

Some common mistakes include delaying investments, not saving for emergencies, ignoring debt management, and failing to budget effectively. Addressing these early can lead to better financial stability.

5. What financial goals should millennials prioritize first?

Millennials should first prioritize building an emergency fund, paying off high-interest debt, and then focusing on retirement savings and investments. Once these are in place, they can work on other financial goals like homeownership or further investments.

 

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