By Caroline Willard
Executive Vice President, Markets and Strategy
CO-OP Financial Services
The world of investing is rapidly changing. Millennials have seen the global economy rise and fall, with housing and stock market crises taking up headlines while they were in high school or college. As a result, a May 2014 study commissioned by CO-OP Financial Services confirmed “Millennials have a starkly different perspective from that of previous generations on the financial services options available to them.”
Even so, many tried-and-true concepts of saving and investing still provide the most stability for investors. In fact, Millennials should brush up on at least five old-school financial concepts as a first step in securing their financial future. They may not represent a new model of thinking, but they’re all safe ways to protect your hard-earned money.
#1 Credit Unions
Even for people who’ve been in the workforce for more than a decade, the idea of credit unions can still be a little unclear.
Credit unions operate similar to a bank — they lend money and provide interest-bearing savings accounts, but the difference is that every customer in a credit union is also a member. In other words, credit unions are not-for-profit cooperatives with decisions made for the benefit of membership, not necessarily the bottom line. The biggest differentiator between banks and credit unions is that credit unions usually offer better rates and lower fees, making them a more profitable long-term partner.
The “Unlocking the Millennial Mystery” study from CO-OP Financial Services, indeed, found “satisfaction is elevated among (Millennial) credit union members – particularly with service, shared values and fees/rates.”
#2 IRA
You’ve probably heard the acronym IRA before, but do you know what it means? An Individual Retirement Account (IRA) is a tax-efficient savings plan. While 401(k) accounts (more on that below) are often sponsored by a corporation, IRA accounts are driven by the individual. There are several different forms of IRAs, and they can be purely voluntary or specialized for self-employment/small business. IRA accounts offer tax benefits but also come with restrictions, such as contribution caps and early-withdrawal penalties.
#3 Home Loans
Real estate is still one of the most stable investments anyone can make, outside of the practical benefit of having a place to live. To purchase real estate, you’ll need a loan (unless you have a huge source of independent wealth).
For Millennials, it’s easy to fear the idea of a long-term home loan, particularly with the housing crisis of the 2000s. Rest assured, it is still possible to get a high-quality loan, one that doesn’t prey on the vulnerable with sub-prime lending. If you have a steady income, home loans are a great way to invest in yourself – instead of paying rent, you’ll be paying off your loan and increasing your overall net worth.
#4 401(k)
When Millennials first join the workforce, they may be unsure about what to do with their savings. With so many options and acronyms, it can be overwhelming and confusing.
So what is a 401(k) account and what are its benefits?
In general, a 401(k) is a tax-efficient savings plan. The money goes into an investment account managed by a provider (with some customizable options regarding aggressiveness of investing) with a set cap that can change year by year, though it is generally fairly stable. That amount is not taxed for your current year, with the idea that it is taxed when you finally withdraw it post-retirement, when you will presumably be in a lower tax bracket.
In addition to tax savings, many corporations match your investment up to a percentage, essentially giving you free money in your 401(k) account.
#5 Stock Options and Stock Purchasing Plans
At a very basic level, stock options and stock purchasing plans are ways for employees to purchase stock at discounted rates.
The mechanism for purchase is different, as well as the volume. For options, generally they vest (become active) at set milestones based on the employee’s tenure, all at a reduced price that is usually related to the employee’s start date. For purchasing plans, employees are usually given a set quarterly price which is a discount from the market value. Employees can elect to have a percentage of their income deducted for these purchases.
Because stock purchasing rates are calculated based on more near-term data, they are usually not as profitable as options. However, for companies that are stable and upwardly mobile, both methods represent sound investments at discounted rates. Managing them has become easier as well, with modern technology such as eShares used by corporations for online management of portfolios.
Five Trusted Concepts
The idea of long-term investing and saving may be intimidating for anyone new to the workforce, but even more so for Millennials who’ve seen the impacts of recession and crisis. It’s easy to not trust the industry institutions simply because they’ve been around through those difficult years. However, there’s a reason why they’ve stood the test of time. For anyone beginning to plan their financial future, these five concepts represent safety and stability – perfect for dipping your toe into the world of investing.
About the Author
Caroline Willard is Executive Vice President, Markets and Strategy, for CO-OP Financial Services, a Rancho Cucamonga, California-based provider of financial technology to credit unions. Willard can be reached at (800) 782-9042, ext. 5934, or caroline.willard@co-opfs.org.
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