Millennials: It Might be Time to Break Up with Cash

It's seen as safe, and maybe even exciting, by many younger, stock-averse savers. But this love affair may be a lot more dangerous than they realize.

While some in older generations have come to loathe traditional deposit accounts because of the disappointing rate of return over the last decade, many Millennials have spent their adult years hoarding cash, thinking it is the safest investment. Well, maybe they should think again.

The Federal Reserve’s recent decisions to raise interest rates are adding to the incentive to use deposit accounts. As interest rates have risen, Millennials may have felt their choice to park their money in high-yield savings accounts was justified. Additionally, with their comfort in technology, many are able to achieve even greater returns by depositing cash into higher-paying virtual accounts. Some of these accounts currently pay as much as 2.25%.

Keep in mind that Millennials — those born from 1981 through 1996 — came of age during the economic downturn, and may still retain vivid memories of a volatile stock market.

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Savers Need to Stay Ahead of Inflation

Needless to say, many Millennials view cash as not only a safe place, but also an exciting one, with the periodic boost in rates. However, with eight rate hikes since 2015, the rate of return on cash still can’t combat inflation, which eats away at purchasing power. One dollar today is going to be worth less than $1 in several decades. For example, if inflation runs at 3%, today’s fancy $5 coffee will cost you $9 in 20 years. The rate of inflation can be viewed as the hurdle that long-term savers and investors alike should aim to achieve just to keep up with the general cost of living.

Savers will find the value of the cash in their nest egg depreciates over time. The danger of playing it too safe in cash in one’s early years can be the risk of missing out on years of investing in stocks while market prices are lower and the returns are compounded, which could lead to additional growth.

One way to move beyond cash and into higher returning equities is to set a cap for cash. For most people that’s six months of expenses. Any savings above that amount can normally tolerate more risk and can thus be invested into stocks. A discussion with your financial adviser can help you identify your unique appetite for risk.

Why Stocks are a Good Fit for Many Millennials

Many Millennials in particular are well-poised to participate in the stock market. This age group has a long time horizon before they need to tap their nest egg for retirement, and can benefit from the power of investing sooner rather than later.

Millennials have more time to consider more aggressive investments as they work and invest for retirement. A bad year in the market may have less impact on younger investors who work and pay their living expenses from their salary, unlike retirees who may be living off their investments.

In addition to the lure of cash, many Millennials tend to shy away from investing simply because they don’t know where to start. Cash is tangible and easy to understand. As a novice, the prospect of picking investments — especially those that are supposed to provide returns over decades — is understandingly intimidating.

On top of that, investing and asset selection requires a detailed look into the future. As tough as it may be to imagine your lifestyle in retirement, that’s a good place to start with your financial adviser.

It’s Never to Soon to Set Goals

If you know you will want to support an expensive lifestyle then you know you’ll need to allocate more of your income now to retirement and invest with growth in mind, normally through stocks, to strategically to reach that goal. Your living expenses today can serve as a barometer. Through inflation things naturally will be more expensive decades from now, so it stands to reason you’ll probably need more income in the future than you do today.

Also consider the things you pay for today and whether you’ll still be paying for them in retirement. For example, you likely won’t still be paying off your student loans and mortgage by the time you retire. The main factor in your allocation is how much you’ll need in the future, how much you need to invest today and how much of a return you’ll need over time to reach you goals.

Another thing to consider is what your risk tolerance is. Ultimately, that’s part of the reason many Millennials hoard cash: It is considered a safe investment. But as we discussed above, inflation will eat away at your purchasing power, which is why equity returns are generally considered the best way to pad your retirement nest egg.

There’s no such thing as a free lunch, so if you want higher expected returns, you will need to take on more risk. That being said, it’s OK if you aren’t someone who is willing to aggressively invest. Your peace of mind is important, so allocate your investments accordingly. If the wild ride of the markets causes you major anxiety, then by all means, prioritize your sanity. However, recognize the tradeoff of safety and what it means to your future. There will never be a more tolerable time for taking risk than in your youth because time is on your side.

When to Change Things Up

Millennials should check their investments on a quarterly basis to stay informed and make tactical changes, but asset allocation changes — meaning the proportional shifts you make across your potfolio between asset classes like stocks, bonds, cash and alternative investments — should happen much more infrequently. Assuming that the investments are being made for retirement, asset allocation changes should happen every few years and sometimes even longer.

The primary thing to look for is whether your goals can be met with your current allocation. If not, there are a couple of things you can do:

  • Save more.
  • Consider increasing the allocation more toward stocks, which are more aggressive than bonds and cash, and thus, over the long term can better help you achieve your goals.

Conversely, if your saving and investing is going so well that you future goals can be easily exceeded at your current allocation, you should consider reducing the risk. You don’t want to take on more risk than is necessary for you to accomplish your plans.

At the end of the day, it’s important to go against your gut instinct to hoard cash and watch your bank account grow fatter. What matters is that you put your money to work for you — and for your future.

The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs.

Securities are not bank deposits, nor are they backed or guaranteed by PNC or any of its affiliates, and are not issued by, insured by, guaranteed by, or obligations of the FDIC, the Federal Reserve Board, or any government agency. Securities involve investment risks, including possible loss of principal.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Justin Sullivan, CFP
Vice President, Investment Market Direct, PNC Investments

As a Vice President and an Investment Market Director in the Southeast market for PNC (opens in new tab), Justin Sullivan provides investment leadership in the creation and implementation of investment strategies. Justin also serves as an investment adviser for complex accounts. Justin works with a team of investment advisers, specialists in financial and estate planning, trusts and banking services to help clients achieve their financial objectives.