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Having an emergency fund is usually a good thing.
However, having too much cash can slow down your overall wealth growth.
It’s especially important for younger investors to make sure they invest money in the stock market, as they have more to gain from a long-term investment horizon.
However, investors in their 20s may be too conservative: This age group has more than 28% of their wealth in cash, according to a survey by financial services company Personal Capital. That’s more than any other cohort besides retirees in their 80s and 90s, who have 29% and 31% in cash, respectively.
“Sometimes, instead of implementing a plan, it’s easier not to think about it,” said Michelle Brownstein, certified financial planner and senior vice president of Personal Capital’s private client group.
Absence of education
According to Brownstein, younger people, especially those just starting out, may not know how much they should invest in the stock market or where it makes the most sense.
A lack of focus, especially for long-term goals like retirement, can mean young people are leaving money on the sidelines, he said. Some are diligent savers but miss the next step of how much they should contribute to investment accounts like an employer-sponsored 401(k), an individual retirement account, or even a brokerage account.
Millennials and Generation Z may also have competing financial goals, such as buying a home or getting married.
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And it’s important, of course, to have an emergency fund, something many have found to be even more of a priority after the coronavirus pandemic. In general, personal finance experts recommend having three to six months, or even more, of living expenses in cash in case of an emergency.
But, if you met that goal and continue to save, that extra money should go into an investment account, according to Brownstein, especially if you don’t plan to need it at all for years to come.
“If it’s not cash that they need in the next 18 months, it should be invested,” he said.
The power of the stock market
Investing in the stock market is one of the best ways to build wealth. By keeping too much cash on the sidelines, younger investors could miss out on years of healthy profits that would benefit them.
That’s because the more time you have for your money to compound (basically, your interest earns interest), the more you’ll accumulate, even if you start with a modest amount.
“The other good thing about investing in the stock market is that it’s relatively easy,” said Roger Ma, CFP of lifelaidout in New York and author of “Work Your Money, Not Your Life,” adding that options like target date Index funds and index funds help simplify the process.
Any retirement fund offers these options, from an employer-sponsored 401(k) to a Roth IRA.
Even those without employer-sponsored retirement plans can invest at little or no cost, Ma said. There are plenty of low- or no-cost brokerage options that almost anyone can access to start buying stocks, and some mutual funds and exchange-traded funds have no fees, he said.
It’s important for long-term savings to grow because if you’re not getting returns on your money, your purchasing power will be eroded by inflation over time, according to Lauryn Williams, CFP and founder of Worth Winning in Dallas. That means as costs go up, you’ll need to save more and more to afford the same things, she said.
“If you put your money in the market now instead, you can start earning an additional amount above and beyond,” he said.
Get on the right track
If you’re not sure you’re saving and investing enough for retirement, there are a few things you can do to assess your situation, according to Brownstein.
The first thing is to make sure you have an emergency savings fund you’re comfortable with, he said. Next, be sure to take advantage of any match your employer offers for contributing to a retirement account, if you have one.
“If you’re not putting in enough to get the match, you’re leaving money on the table,” he said.
She also recommends taking the time to educate yourself about saving and investing and planning to meet your goals or seeking guidance from a qualified financial advisor.
“Not knowing how to do something means I have to work at it and learn it,” he said. “No one else is going to make sure you have enough for retirement, that’s up to all of us.”
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