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Having too much money does not increase your wealth. Do this instead

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Having an emergency fund is usually a good thing.

Having too much money, however, can hold back the growth of your overall wealth.

It is especially important for young investors to ensure that they invest in the stock market, as they have the most to gain from a long investment horizon.

Yet investors in their twenties may be too conservative. This age group owns more than 28% of their wealth in cash, according to a survey by financial services firm Personal Capital. That’s more than any other cohort outside of 80 and 90-year-old retirees, who have 29% and 31% in cash, respectively.

“Sometimes instead of having a plan in place, 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.

Lack of education

Younger people, especially those just starting out, may not be sure how much they should invest in the stock market or where it makes the most sense, according to Brownstein.

A lack of focus, especially for long-term goals like retirement, can mean young people are leaving money behind, she said. Some are diligent savers, but miss the next step in how much they should contribute to investment accounts such as an employer-sponsored 401 (k) account, individual retirement account, or even a brokerage account. .

Millennials and Gen Z may also have competing financial goals, like buying a house or getting married.

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And of course it’s important to have an emergency fund, which many have found is even more of a priority after the coronavirus pandemic. Typically, personal finance experts recommend having three months to six months or even more of living expenses in cash in an emergency.

But, if you’ve achieved that goal and keep saving, that extra money should go into an investment account, according to Brownstein, especially if you don’t expect to need it for anything over the next few years.

“If it’s not the money they need in the next 18 months, it should be invested,” she 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 money aside, young investors could miss out on years of good returns that would benefit them.

This is because the more time you have for your money to be essentially compounded, your interest earns interest, the more money you will accumulate, even if you start with a small amount.

“The other advantage of investing in the stock market is that it is relatively easy,” said Roger Ma, CFP atliving arrangementin New York and author ofWork your money, not your life“, adding that options such as target date funds and index funds help simplify the process.

Any retirement fund offers these choices, from an employer sponsored 401 (k) to a Roth IRA.

Even those without an employer-sponsored pension plan can invest with little or no cost, Ma said. There are many low-cost or no-cost brokerage options that almost anyone can access for. start buying stocks, and some mutual funds and exchange-traded funds have no expenses, he said.

It’s important to grow long-term savings because if you don’t earn a return on money, its purchasing power will be eroded by inflation over time, according to Lauryn Williams, CFP and founder of.Is it worth it in Dallas. This means that as costs go up you will have to save more and more to be able to afford the same things, she said.

“If you instead put your money in the market now, you can start earning an extra amount beyond that,” she 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.

First, make sure you have an emergency savings fund that you are comfortable with, she said. Then be sure to take advantage of any consideration offered by your employer to contribute to a retirement account, if you have one.

“If you don’t put in enough to get the game, you are leaving money on the table,” she said.

She also recommends taking the time to educate yourself about saving and investing, and planning to achieve your goals or seeking advice from a qualified financial advisor.

“Not knowing how to do something means I should work on it and learn it,” she said. “No one else is going to make sure you have enough for the retirement that is incumbent upon us all.”

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