What millennials should invest in
If you're young and working with small amounts of capital, here's the best investment you can make.
I was thrilled. My cousin came to me with a question few 19-year-olds ask: what should he do with the $5,000 he had saved. He knew I was an analyst and had already read about the benefits of investing. He was ready to dive into the market.
I told him to forget about it. At least for a while.
We've explained before how putting money aside while you're young makes a huge difference to your future wealth. Age wasn't the issue. We also recently explained that you don't need much to start investing, perhaps as little as $500. So it wasn't a matter of money.
Investing is all about measuring opportunity costs and figuring out how you can get the most bang for your buck. For many, the best investment has nothing to do with stocks and bonds.
If you're young and just starting out, the best investment you can make is in setting yourself up for a great career. I told him to invest the money in his education.
There's no shortage of gurus preaching how to earn better returns and save more ... sometimes with bizarre advice like drying and reusing paper towels or substituting soap for toilet paper because it's cheaper.
Saving is hard, though - especially if you're earning minimum wage. In the plethora of information available on budgeting and investing, it's easy to miss a simple fact: if you earn more, you'll probably retire richer. Spending $5,000 on a career-oriented diploma or bachelor degree could add hundreds of thousands to your retirement honeypot.
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Having a degree isn't the be-all and end-all; plenty of people do well in life without one. Nevertheless, education and income tend to rise in sync. The Australian Bureau of Statistics found that the average salary for someone who didn't pursue education after school was around $47,000. That grows to $62,000 for those with a diploma, $73,000 for those with a bachelor degree, and $94,000 for those with post-graduate qualifications.
Let's pretend you're a terrible saver and only manage to put away the 9.5% compulsory super contributions that your employer deals with. Given the average wages mentioned above, someone with no degree might be contributing $4,500 per year to their super, whereas someone with a bachelor degree could be putting away $7,000.
A difference of $2,500 a year doesn't sound like much, but it adds up over time.
Let's say a 21-year-old school-leaver is saving $4,500 a year and continues to do so until they're 66. Their investments would reach around $1.0m by retirement at a 6% rate of return, the 30-year average for the stockmarket after adjusting for inflation. But someone with a bachelor degree contributing $7,000 to their super each year would have $1.6m - a $600,000 difference in retirement savings.
Investing in your education isn't a fail-safe way to retirement riches. Not all degrees are equal in the eyes of employers - having a science, IT or engineering degree could add thousands to your wage, but it will be harder to get ahead specialising in Latin or theatre. It makes sense to first look for industries that interest you and pay high salaries, then target the education path that gets you there.
Investing in non-formal education can also pay dividends. Books and courses that improve your communication skills, self-confidence, financial literacy and mental health will almost certainly add more to your nest egg than their cost. The long-term impact of negotiating even minor pay rises is underrated.
Investing is important - particularly when you're young - but if you're working with a small bag of seeds, all the watering in the world won't build a great crop. Focusing first on getting a bigger seed bag is one of the best investments you can make.
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