The Five Biggest Myths About Saving Money?
December 10, 2015When one of my colleagues recently sent me an article titled “The Five Biggest Myths About Saving Money, According to a Millennial,” I was intrigued. After all, it can be fun to bust myths, especially about something as important as saving money, and hearing a Millennial perspective is interesting, both because I might be one myself (I was born in 1979 and Millennials are sometimes described as being born in the late 70s and other times in the early 80s so maybe I’m actually something called an Xennial) and because they (or we) are the future. The article features the views of Ethan Bloch, the 30-yr old founder of Digit, an online financial company. Here are the “myths” about saving that Bloch aims to correct:
1) “It’s important to get a job and start saving for retirement the minute you’re out of college.”
Bloch argues that “it’s more important to spend time thinking about what you want to do and improving your earning potential.” First of all, how are these things mutually exclusive? In fact, working at a job is one of the best ways to find that Venn diagram intersection between what you enjoy, what you’re relatively good at, and what people will pay you. Actually doing a job can be VERY different than in theory, and getting that experience is not a bad way to improve your earning potential as well.
There’s also a good chance that what you really want to do may not involve having a job at all. Unless you plan to live in your parents’ basement forever, that’s what “retirement” allows you to, and you’ll probably have to save to make that happen. (You can also think of saving for retirement as your Plan B if your idea for Plan A doesn’t pan out exactly as you hope.)
2) “Getting a credit card right out of school is dangerous.”
Bloch compares getting a credit card with a low credit limit with “training wheels.” I actually agree with him on this one as long as you actually learn to ride the bike safely. In that case, a credit card can help you build a positive credit history. Just make sure you make on-time payments and try to pay the balance off in FULL. Otherwise, those training wheels can get expensive.
3) “The American dream involves buying a house.”
Bloch’s points out that “nowadays it often makes a lot more sense to rent than buy” and “People in their twenties don’t have a lot of responsibilities, and that should be leveraged.” Both of those statements may be true for you now, but if you plan to eventually settle down and have the responsibilities of a family, buying may come to make a lot more sense than renting (financially and/or emotionally) and that should be leveraged too. Go ahead and rent while you’re and flexible, but take steps to protect and improve your credit and start saving for your down payment and closing costs.
4) “Once you graduate, immediately try to build up a cash emergency fund.”
Bloch suggests that your 401(k) can be your emergency fund. Aside from the fact that it contradicts his comments on “myth #1,” there are a few problems with this. To access the money while you’re working, you can generally only borrow up to half of your vested account balance (up to $50k) or apply for a hardship withdrawal that you may not qualify for. The former has to be paid back from your paycheck and the latter is subject to taxes and early withdrawal penalties. Both can make a financial emergency even worse.
Your best bet is to have a bona fide emergency fund that’s easily accessible to you when you need it. (If saving for retirement is Plan B, consider this Plan C.) I can understand not wanting to accumulate a lot of cash earning less than 1% though. Here are some ways to make your emergency fund work harder for you.
5) “Investing is difficult, and stocks are sexy.”
Bloch recommends you “just put money in an index fund on a recurring basis and go back to living your life and you’re done.” He’s right that investing isn’t as complicated as it seems and that choosing a low-cost index fund that simply tracks the market is probably a better bet than buying a high-fee active mutual fund or trying to pick stocks on your own. However, our generational research indicates that Millennials tend to have less investment knowledge than their older counterparts and may be more conservative as a result. You don’t want to invest overly aggressively all in a stock index fund only to panic and sell out during the next (inevitable) market downturn.
One option is to use a “robo-advisor” to help you put together a diversified portfolio of index funds that matches your comfort with risk. If you don’t have access to one in your employer’s retirement plan, see if your plan offers target date retirement funds. While the fees may be slightly higher than an index fund (unless you’re fortunate enough to have access to target date funds that are made up of index funds), these are more diversified and will automatically become more conservative as you get closer to retirement. As your investing knowledge and account balance grow, you can transition to a more customized portfolio of lower cost funds.
Overall, I actually agree with a lot of what Bloch says. Investing in yourself is one of the best investments you can make, especially early in your career. Credit cards aren’t always harmful. It may not make sense to buy a home right away. You probably don’t need an investment advisor.
But as with most things, the devil is in the details. The key is to find out what works best for you. If you’re the founder of an online financial company, much of Bloch’s advice may indeed apply to you. Then again, if you’re fortunate to be in that position, you probably don’t need his advice. For the rest of us, don’t ditch that Plan B (and C) quite yet.