Gen Z Leads the Way in Early Investing, Experts Highlight the Power of Compounding

According to the 2024 Schwab Modern Wealth survey, Generation Z is leading the way in early investing and saving. Unlike baby boomers, who began investing at an average age of 35, and even millennials, who started at 25, Gen Z adults have taken the plunge at the age of 19 on average. The power of time and compounding works in their favor, as starting early and starting small can lead to significant wealth.

The 2024 Schwab Modern Wealth survey, which surveyed 1,000 Americans aged 21 to 75 in March, highlighted the critical role of time in investing. It emphasized that a teenager opening a retirement savings account could end up with hundreds of thousands more dollars compared to someone who began saving in their 20s. For instance, an investor starting at 25 could end up with approximately $998,000 by contributing $5,000 annually until the age of 65, with an average annual return of 7%. In contrast, someone who starts at age 19, contributing only $30,000 more, could end up with over $1.5 million. Delaying until 30 would yield about $691,000.

Expert Recommendations

Financial experts recommend young people to build wealth by opening a Roth IRA, which allows after-tax contributions and offers tax-free growth and withdrawals in retirement. They advise that every young person, upon getting their first job, should prioritize Roth IRAs or Roth 401(k)s if they qualify.

Gen Z's confidence in investing stems from the growing accessibility of financial resources. The Schwab report revealed that 28% of Gen Z individuals learned about investing in school, surpassing millennials at 19% and Gen X at 12%. Access to abundant online and social media information has also played a significant role in shaping their financial understanding, providing them with resources that were not readily available to older generations at such early ages.

Caution in Information Consumption

While the availability of financial information online and on social media has empowered Gen Z, financial experts caution against relying solely on these sources. They recommend seeking advice from a trusted financial advisor before making any investment decisions, emphasizing the need for knowledge, context, and long-term investment planning over short-term attractive market trends.

The Schwab survey found that the majority of respondents are swiping past finance influencer content on social media, with 76% stating that they don't follow any finance influencers, and 65% reporting that social media has no impact on their investments. Instead, respondents expressed a higher likelihood of engaging with a financial advisor (57%) over seeking financial advice from social media platforms (42%).

Student Loan Concerns

Despite the growing concern of student loans among young people, experts advise that it should not deter them from investing. In the second quarter of 2024, U.S. Department of Education data shows that 6.8 million borrowers under 24 hold a total of $99 billion in federal student loan debt. For the 14.8 million borrowers ages 25 to 34, the amount rises to $490 billion. However, experts stress the importance of balancing debt repayment and investing for future goals.

Expert's Advice

Experts encourage individuals to make the minimum payment on their loans and initiate small contributions to retirement savings, even if it means setting aside just $100 a month. As the student loan debt diminishes with regular payments, they emphasize that individuals will have already kick-started their retirement savings, allowing for a more substantial commitment from their budget.