It’s been all over the internet lately: Millennials can’t afford homeownership because we’re too busy spending all our disposable income avocado toast, fidget spinners and bottle service at the club.
While it made for an effective meme, the cost of one house could feed a medium-sized city with avocado toast. And despite what the positive-psychology gurus on TV might say, cooking one or two meals at home every week won’t ever put enough in the bank to afford that down payment. Not when an average condo in Brooklyn costs 100,000 slices of avocado toast, and even a small house in Cleveland will set you back ten thousand Starbucks Unicorn Frappuccinos.
But don’t pass the guac quite yet – these tiny steps do matter, just not for real estate. While
If you’re in your twenties, and looking for your first job out of college or grad school, a 401(k) is probably the last thing on your mind. Retirement is still a whole career away, often 40 years or more, and financial stability with a job, let alone without one, still seems like a distant dream.
The average Millennial college graduate makes just $13.60 per hour in their first year in the workforce. Between rising rents, big-city cost of living, cell phone bills, festival tickets, and the dreaded student loan bill, there isn’t all that much room for savings. But is a modest contribution worth it?
At first the answer seems like a definite no. Contributing even $100 a month would only amount to a drop in the bucket, $1200 in the first year, when retiring at 69 with a satisfactory standard of living will likely cost well over a million. But this is where things get interesting.
Many employers match employee contributions at an equal rate – suddenly, that $100 a month becomes $200 – up to a certain limit, usually 5% of earned income. From there, it’s time to let compound interest run its course.
Whether you choose to invest in stocks, bonds, or more conservative money market options, your account will have a rate of return, or growth, and your profits will be reinvested back into the 401(k), along with any dividends or interest from your shares. At an average rate of return of 7% (which the S&P 500 has delivered, long term, since its inception, and a competent mutual fund manager should be able to achieve), after 10 years your $2400 from that first year will nearly double to $4721. After twenty years, halfway to retirement, you’ll have $9287, and after 40 years, when you’re first likely to withdraw money from your 401(k), it’ll increase to $35938, nearly 30 times what you gave up this year. And if you pick a particularly strong fund that averages 9.9% per year, you can make $100000 off your first year’s contributions alone!
Add to that the tax advantage at either end — 401(k) contributions come from your pretax income, and as long as you wait until you’re at least 59½ to take money out, you won’t have to pay capital gains either — and it becomes clear that skipping a few slices of avocado toast now really can help you be a millionaire later.