By no means do Smith and Simon represent the norm. There are still large numbers of young adults, particularly African Americans, who fail to invest early. According to the advocacy group United Fair Economy’s most recent report on U.S. saving and investing, only 18% of blacks have retirement accounts, compared to 43.4% of their white counterparts. Furthermore, younger workers are less likely to participate in a retirement plan than older workers with the same earnings, according to the Employee Benefit Research Institute. “In their minds retirement is a really long time away and they don’t realize that the 30 or 40 years that a person can invest are valuable years,†says Ed Fullbright of Fullbright Financial Consulting in Durham, North Carolina.
Here’s an example to bolster Fullbright’s point: If a 20-year-old deposits $50 in the bank each month for 45 years with an interest rate of 3% compounded monthly with an initial starting balance of $500, the final savings balance, assuming retirement at 65, will be $58,944.11. By contrast, if the same person waits until 30 to start investing that same $50 per month, the total at retirement would equal $38,505.14.
That’s a message young investors have a hard time communicating to their friends. Charles Weems III, a 27-year-old software engineer, says many of his peers think investing will take away from having fun. “Most young people are more concerned with driving a nice car and going on trips; they want this lavish lifestyle,†he says. Weems is speaking from experience. When he started working he spent most of his money eating out, taking road trips, and picking up the tab during nights out with friends. Now he realizes he can put money away and still live life. A few years ago, he started contributing 10% of his income to his 401(k). He also puts $400 each month into a Roth IRA. Since last September, he has devoted between $400 and $700 a month to investing. Weems recently purchased more than 250 shares of Fannie Mae (FNM) while it was trading at $2.38. He believes that the government bailout will help the company regain its footing.
Young investors find that they often have to dispel myths when talking to their friends about delving into the markets. One of those myths: Investing is too complicated. Kevin Njeru, an 18-year-old junior at the University of Florida, decided to jump into the market during the fall of 2008 after joining the campus investment club. “When I first started I thought [investing] was going to be difficult, but it’s not difficult at all if you’re willing to put in the time,†he says.
Njeru bought $400 worth of shares in the exchange-traded fund Vanguard Information Technology (VGT), which tracks the performance of several large, medium, and small U.S. companies. Exchange-traded funds (ETFs), allow him to hold dozens, hundreds, or even thousands of companies under one umbrella. Njeru’s excitement about the fund stems from his belief that the economy will recover, and that companies such as Apple and Intel will continue to be innovative and power future U.S. growth. “Young people spend so much time on Facebook and MySpace, but they can just as easily have another tab open researching stocks,†he says.
The second big myth about investing: You need a lot of money to start. So not true. It doesn’t matter how little you start with, the key, say many Generation Y investors, is that you begin while you’re still young. “You don’t need hundreds of thousands of dollars to invest. Warren Buffet and Bill Gates started out small, they started out with what they had,†says Simon.
“There’s definitely a reward at the end of this.â€
— Additional reporting by Renita Burns.