Every generation has to learn financial lessons in their own way, and these are influenced by different economic factors and social trends. However, Gen Z may be the first generation to really make their investing decisions based on something their parents and grandparents did not: social media.
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According to a recent economic report, Gen Z is very driven by social media influence when making investing decisions. This can lead to FOMO (fear of missing out) and risky suggestions that could cost Gen Z what money they’ve managed to make in their young lives.
Experts explain some time-tested strategies for Gen Z to invest instead of jumping on hot social media trends, given their much longer time horizon, and potential to take on somewhat greater risks than older generations.
Invest Early
What Gen Zers have going for them is the ability to start early and take advantage of compound interest for a long time, according to David Blain, a chartered financial analyst (CFA) with BlueSky Wealth Advisors.
“Even small amounts can grow significantly over time, which is a concept I emphasize to all younger investors,” Blain said. “This principle was clearly illustrated when discussing the benefits of saving $25 a week, showing how such small, consistent investments can build a considerable nest egg over time, offering a more stable and secure financial future than chasing after the latest investment fad on social media.”
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Invest Fixed Amounts
Secondly, Blain said that the strategy of “dollar-cost averaging” can significantly reduce the risk of market timing, which he called “a common trap for less experienced investors.”
“By investing a fixed amount regularly, regardless of market conditions, one can lower the average cost per share over time, which is a crucial strategy in the uncertain investment climate that often affects Gen Z investors influenced by social media.”
Do Your Research
Blain shared a critical lesson from his military background that he said applies to investing, which is “facing the world boldly, not blindly,” adding, “This means conducting thorough research and due diligence before making investment decisions, rather than blindly following the recommendations found on social media.”
A well-thought-out plan based on clear goals and risk tolerance is essential for long-term success in investing, he said.
Avoid Quick Wins
Blain recommended Gen Z avoid “the lure of quick wins, celebrated and often exaggerated on social media,” and instead focus on solid, time-tested investment principles like early savings, diversified portfolios and regular investing.
“[A] disciplined approach to investing, grounded in knowledge and thorough planning, will always outperform the erratic swings of social media trends.”
Establish Good Credit
Gen Zers are also in the prime age range to establish good credit, according to Diane Bourdo, a certified financial planner (CFP) and president of The Humphreys Group.
“As your credit score dictates your eligibility for anything from buying a new home to taking out a business loan, it’s incredibly important to build up good credit. A couple tips for keeping your credit score up are to always be sure to pay your credit card bill on time and to keep your outstanding balance below 30 percent of your credit limit.”
Overprepare For Retirement
Bourdo said that instead of spending money on flashy investments, Gen Z should save a year’s salary for retirement: “If Gen Z and Millennials can learn anything from previous generations, it’s to over-prepare when it comes to retirement planning,” Bourdo said. “If your employer doesn’t offer retirement benefits, it’s your responsibility to open up an IRA or a 401k, both of which allow you to invest money for retirement.”
Establish a Rainy Day Fund
Otherwise known as an emergency fund, Bourdo urged Gen Z to start this type of savings now. “If an emergency happened, would you be prepared?” she asked. “Nobody can predict if and when an emergency will occur, but you can ensure that you’re prepared in case of the worst. Whether your car breaks down or a global pandemic breaks out, having a rainy day fund ensures that you’re not caught completely off-guard.”
Appreciate that Money is a Tool
Money is important, Bourdo acknowledged but at the end of the day, it is just a tool. “It’s critical to understand the value of money, to be smart with your finances and to think about the future as much as you think about the present, but try not to let money control your life,” she said.
Be Consumer Debt Free
Another wise move Gen Z can make instead of risky investments, Bourdo said, is striving to stay out of consumer debt.
“We understand that some debt might follow you into your 30s, from student loans to personal business loans, but consumer debt should be a worry of your past,” Bourdo said.
“By the time you reach 30, you should be capable of budgeting and living within your means. If you can’t afford a fancy car, you shouldn’t be buying a fancy car. If you need to open up a new credit card to afford that trip to Cabo, you can’t afford that trip to Cabo.”
Gen Z is poised to make smart decisions if they listen to financial professionals and avoid seemingly hot trends and bad advice that finds its way onto social media.
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This article originally appeared on GOBankingRates.com: What’s Endangering Gen Z’s Ability to Invest and The Easy Way to Avoid It
