The Power of Compound Interest: Why Millennials should start Investing Now

The Power of Compound Interest: Why Millennials should start Investing Now

By Katie Gomez

Millennials need to start taking control of their finances to set themselves up for a strong future. The key to this change is understanding the importance of saving and investing for future benefit, specifically compound interest. In addition, the younger generations have the advantage of innovation and inspiration that generations before them have lacked. 

Still, their impulsivity and favor of short-term gratification will be a significant disadvantage regarding their financial future. It’s no fault of their own that Millennials/GenZ tend to lack awareness of long-term consequences or gains from present actions because they grew up in the age of technology; anything they wanted to know was just a click away. In contrast, older generation individuals (i.e., GenX and baby boomers) can enjoy the short-term gratification that things like technology can bring, but were raised to be equipped with delayed gratification (more than their younger counterparts).

For instance, to a millennial, a drop of water falling from a leaky faucet is overlooked and ignored, while a member of GenX might see the potential for wasting water and fix it before the problem gets worse. Furthermore, the same mindset applies to older vs. younger individuals in terms of saving and investing money. 

Now imagine a drop of water is like a portion of your paycheck that you can transfer into a savings investment account, like a 401k. While older individuals tend to see this habit as a non-negotiable for future retirement, younger individuals tend to put off contributing because they want to have their whole paycheck now instead of letting it build interest for their future (immediate > delayed gratification)

According to a survey by Morning Consult, 49% of GenZ (18-25 age range) owned at least one investment product, down from 60% the year prior. However, Millennials (ages 26 to 41), the generation more equipped to support, fell by almost 20%, which is an even greater tragedy, considering they are the age more prepared to focus on investments. Whether it is recession fear that has halted future investments or simply allowing other concerns to take priority, it is clear that investing has been put on the back burner for most Millenials and GenZ. 

Additionally, the shift from traditional 9 to 5 jobs and careers has become more prevalent than ever, meaning those unable to take part in a 401k retirement account will have to start a retirement plan themselves to ensure they are set up financially for retirement when the time comes. When there isn’t a 401k system automatically investing for you, you must start investing yourself, which will require a conscious choice. Fortunately, there are plenty of ways millennials can start investing, even without an employer offering a 401k plan, like IRAs.

To succeed at anything in life, you must be in it to win it, especially in investing. So despite the fear of recession around the corner and lingering losses in 2022, it’s a great time to invest. Ignoring the fearmongering and negative returns occurring can allow you to start buying for cheaper than you would believe. The average P/E of the S&P 500 has indicated that the market is cheaper than the historical average. Of course, there will never be perfect times to jump into anything, let alone investing. However, based on current information, this is likely the best time to start making investments a priority. 

The best part about investing now (earlier in life) is the benefit of compound interest. Compound interest is the interest on a loan or deposit calculated based on the initial principal and accumulated interest from previous years. It is crucial millennials take advantage of this powerful tool ASAP because it is designed for growing wealth over time, as the interest earned in each period is reinvested and begins to make more interest in subsequent periods. In other words, the earlier millennials can start investing, the sooner they can begin reaping the benefits of compound interest and, thus, the higher return they yield. 

Millennials can accumulate significant wealth by investing early and allowing their investments to grow over time, even with relatively modest contributions. In other words, even setting aside a small amount of your income to invest (money you won’t even notice is gone) can set you up for a successful retirement. First, however, you must be willing to shift your perspective around money to the long game and give up a fraction of immediate gratification. 

Focusing on the long-term opportunities arising from the current market climate will help Millennials and GenZ shift perspectives to success in their investing journey. If we all stopped investing due to fluctuations in the market, we’d be in an endless loop of withdrawals and deposits. To maximize compound interest benefits, you must learn how to leave your money where it is, not letting your emotions dictate your choices. If you let fear and anxiety continuously pull the parachute, ditching your investments, you will soon have no money in your account left to invest.

Instead of constantly driving yourself crazy trying to base your actions on what the market plans to do next, choose to invest incrementally (low risk) and consistently (high reward). If you continue this action plan, you will succeed in the long run (as long as you don’t let short-term panic moments scare you from sticking to your plan).

If history has taught us anything about the market, it’s that: everything seems to work itself out in the long run; people are just too impatient to see it through (think of the tortoise and the hair). So if there is a market pullback, you will likely get a higher return yield. But, on the other hand, if the market proves resilient, you can still expect the economy to continue growing with your investments over the next few decades. Therefore, from a long-term perspective, investments could still be cheap, even when the market appears expensive, like it does today. 

In conclusion, Millennials and GenZ must start setting themselves up for the future. However, it will require accomplishing the uncomfortable by continuing to put effort into something, even though they will not reap the benefits for some time. Investing is a great tactic to set yourself up for the future, but it is also a solid habit to learn, especially for younger individuals. Investing allows us to expand on our short attention spans and pleasure-seeking behaviors and familiarize the mind with delayed gratification. Over time, we’ll find it easier to start making decisions for the benefit of the future self by sacrificing some pleasure for the present self.