Are Millennials Too Conservative With Their Money?

They’re young, hip and eager to leave their mark on the world. But when it comes to investing to reach their financial goals, Millennials act more like their grandparents than a new era of investors. And Millennials (also known as Generation Y) feel that their planning needs improvement. Yet many of today’s youngest investors are stalled when it comes to getting help.

This is one of the key findings of a recent Northwestern Mutual study, Planning and Progress 2014: Millennials’ Approach to Money Management. According to the survey, Millennials (young Americans born between 1980 and 2000) recognize the importance of saving; however, nearly seven in ten Millennials (68 percent) believe there is room for improvement in how they plan.

Part of the issue is that Millennials as a group tend to be too conservative when it comes to their money. One in three Millennials favor “slow and steady” as their financial planning approach, while another 30 percent would prefer to be more cautious but feel they have a lot of catching up to do.

This confirms what Chantel Bonneau has experienced as a financial advisor for Northwestern Mutual and as a Millennial herself. “Like every generation, Millennials are defined in part by their experiences. Many of us came of age during a period of incredible economic uncertainty. We witnessed two major stock market declines, saw our parents struggle to build back lost retirement savings, graduated into one of the worst job markets in American history—and did so carrying an unprecedented level of student debt. It’s no surprise that when it comes to risk tolerance, we tend to be on par with our grandparents, the generation that lived through the Great Depression,” said Bonneau.

An analysis by Bankrate.com confirms just how conservative Millennials tend to be with their money. It’s important to keep a cash reserve of three to six months of expenses for short-term emergencies. But American workers under age 30 are more likely than any other age group to choose cash as their favorite long-term investment, according to Bankrate.com’s July 2014 Financial Security Index. Thirty-nine percent say cash is their preferred way to invest money they won’t need for at least 10 years. Significantly fewer Millennials responded that they favored stocks. This is notable, especially since the S&P 500® Index posted double-digit gains over the past year while most cash investment yields remained below one percent.

“Of course, being careful with your money is never a bad thing,” said Bonneau. “Living within your means and paying down debt can benefit you in the long run. However, being too conservative with your savings can come back to bite you in later years. This is especially true for Millennials who, because of longer life expectancy, uncertainty surrounding Social Security and a lack of pension benefits, face a greater burden to save for retirement than any prior generation. Keeping all your money in cash isn’t likely to generate the returns necessary to help build a large enough nest egg to achieve the lifestyle you want for the future. It also won’t help your money keep pace with rising costs over time.”

What advice does Bonneau have for young investors getting started? Consider the following pointers for putting your retirement savings on track.

1. Be clear about your future. Even though retirement may seem light years away, the sooner you begin visualizing the type of lifestyle you want in the future, the better. Start by taking a look at what milestones you expect to meet, whether it’s getting married, buying a house, having children or retiring early. Then, quantify what it will take to get there. “It’s not enough to make a plan,” says Bonneau. “Exercise the discipline to follow it. Juggling financial priorities may require you to put off some of today’s needs and wants in order to achieve tomorrow’s goals.”

2. Maintain perspective. Watching the rollercoaster in the financial markets has left many Millennials with a poor appetite for risk, especially when it comes to investing in stocks. Yet younger investors have decades to go before retirement and thus the ability to ride out market ups and downs, says Bonneau. “As bumpy as the ride was during the financial crisis, those who hung in there through the market turmoil not only went on to recover their losses, they came out well ahead as the markets rebounded.”

3. Save early and often. While it may seem too early to start saving for retirement or difficult to find room in your budget, Bonneau urges younger workers not to squander an important advantage—and that’s the power of time and compounding. “Your 20s and 30s are ideal years to put a savings plan into place,” explained Bonneau. “Even if you can afford only a small amount, saving now may result in a bigger nest egg down the road. That’s due to the power of compounding interest, which helps your savings swell over time.”

4. Put away the plastic. Before making a purchase, ask if it’s really worth it. Do you really need a new car? Can you do without a latte on the way to work? What if you went out to eat only one night per week vs. two or three? Ask these questions and assess your situation. “You might be surprised at how a few simple changes to your spending can impact your ability to save more for your future,” said Bonneau.

5. Get some advice. If you aren’t sure how to get started, don’t worry; you’re not alone. Although Millennials are ahead of the curve in making financial planning a priority, according to the Northwestern Mutual Planning and Progress study, only 13 percent of adults age 18-29 have a financial advisor. Two of the top barriers to having a solid financial plan? Not knowing where to find help and lack of time.

“One of the most important roles a financial professional can play is serving as a kind of life coach who can have an objective discussion about risk and investing, including how to maintain discipline through various market cycles,” explained Bonneau. “For many Millennials, that means working with an advisor who can relate to their unique needs; someone who understands that financial planning for Millennials includes budgeting, strategizing around student loans and other debt, building savings, tax planning, buying insurance and a whole lot more.”

That concept may be the one that wins over reluctant Millennials, especially those who recognize the importance of saving but are concerned that they’re not doing enough to achieve all their personal and financial goals. “There’s so much information about investing out there that many younger investors feel paralyzed that they could make the wrong decision about their money. Working with a financial professional can go a long way to helping them become more confident about putting their money to work for them and the lifestyle they envision for the future,” concluded Bonneau.