Do you understand millennial money?

If you are a (relatively) young person do you think about retirement? More than likely you don’t, and even if you do, you’ll be thinking, “I don’t need to consider saving for old age, it’s 40 years away.”

Yet, according to Patrick O’Shaughnessy, author of the book Millennial Money: How Young Investors Can Create a Fortune, this view is completely false. We should still give thought to the future, no matter how young we are. For Millennials, the generation born between 1980 and 2000, this is particularly true. To put it simply, if the Millennials want to retire happily and safely, they’ve got to act now. If they fail to do so, they will indeed find life as pensioners very hard.

Imagine yourself in 50 years: What kind of life would you like to have? Do you want to live comfortably, with lots of money saved, or would you rather be dependent on a tiny pension, feeling pangs of anxiety with every purchase?

The choice is an obvious one between these two truths. And what would you do to achieve financial stability that lasts? While many think the best way to plan for the financial future is to establish a savings account, sadly, that’s not the case. The fact is, savings account interest rates are usually lower than the inflation rate (annual price increases). Meaning: In terms of its real world buying power, money parked in a savings account actually loses value.

So if not savings accounts, then what? Well, you should invest in the stock market as early as possible. Don’t underestimate the potential rewards of starting to invest early in life. After all, when you start young, your money has more time to multiply in value.

For instance, if you invest $10,000 every year on the stock exchange with an annual return of seven percent, you’ll earn $4.7 million by the time you’re 65 – if you started investing at age 22. On the other hand, if you made the initial investment only at age 40, you’ll end up with just $1 million.

Although the advantages of investing young are clear, many Millennials aren’t doing so, partly because they entered adulthood in the midst of the 2008 financial crisis – the worst downturn since the Great Depression of the 1930s.

And as a consequence of the financial collapse, Millennials tend to be more risk-averse than their parents’ generation. For example, a 2014 survey on risk found that only 28 percent of Millennials’ money was invested in stocks, compared to the 46 percent invested by other generations.

Some people think, “I don’t have to invest for the future because when I retire, I’ll have a pension!” But what if you don’t?

It’s a real possibility. Consider the fact that average life expectancy increased from 47 in 1900, to 79 in 2013. Today, there are more people living past retirement age than ever before.

As a consequence, the government has higher costs for pensions and health care. Medicare spending, which has grown by 11 percent every year since it was first established in 1966, is one example of this trend.

And, sadly, this upward trend is likely to remain stable in the short term , especially because baby boomers are only beginning to retire (the enormous generation born after World War Two). And finally, since these rising health and education costs are untenable, there is no assurance that future generations can continue to receive education benefits from the government.

Remember, our government runs like any business: If it doesn’t keep its accounts balanced, it risks bankruptcy. Or to put it more concretely, the government has to receive enough in taxes to match benefit spending.

But that’s not currently happening: According to recent calculations, there’s a $9.6 trillion gap between projected spending on benefits over the next 75 years, and what the government expects to raise through taxes.

That’s a big issue for millennials. This suggests that since this younger generation is now paying taxes to help the elderly, as it hits retirement age, it is unlikely to receive the same benefits. So this means that without government aid, millennials are going to have to support themselves. And if they hope to do so, then they should start saving as early as possible in the stock market.

If you’ve decided to start investing in the stock market, you’re probably wondering where to begin. Well, the first guiding principle is to invest in companies all across the world.

This advice is not followed by many people: they put all their money into a few businesses located in just one country. But this is a risky strategy in the long-term. And if that country’s stock market is failing, you might theoretically lose all your cash.

Consider Japan’s stock market index, the Nikkei, which was growing at 30 percent in 1989. Although many people made huge investments in this seemingly “strong” market, the massive growth turned out to be a product of an unstable financial bubble – and the bubble burst in 1991. Ultimately, a 1989 Nikkei investor’s portfolio would only be worth half as much in 2013.

As you can see, it’s risky to place all your eggs in one basket, so why do individuals do it? Well, in the false hope of a stock market bubble, many get swept away. “Others believe like they spend wisely because they purchase shares in companies they” respect. “American investors, for instance, had 72 percent of their money in US stocks in 2010. Simply put, Americans, like Burger King and General Motors, prefer investing in familiar businesses.

But if you want to invest successfully, get out of your safety zone and spread your investments over large, diverse areas. This approach will protect your money even if one company or economy collapses.

As you can see, it is risky to place all the eggs in one basket, so why do individuals do it? Well, many get caught up in the false hope of a bubble in the stock market. “Others believe like they spend wisely because they purchase shares in companies they” respect. “American investors, for instance, had 72% of their money in US stocks in 2010. Simply put, Americans, like Burger King and General Motors, tend to invest in familiar businesses.

Check out my related post: What’s the best investment in the world?

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