MONEY Savings

Millennials Are Hoarding Cash Because They’re Smarter Than Their Parents

Cash under mattress
Zachary Scott—Getty Images

Sure, young adults could get higher returns by investing in stocks, but many have good reasons to stay safe in cash right now.

Another day another study about the short-comings of Millennials as investors. This time around, Bankrate.com weighs in—data from their latest Financial Security Index show that 39% of 18-29 year-olds choose cash as their preferred way to invest money they won’t touch for least 10 years. That’s three times the percentage that would choose stocks.

“These findings are troubling because Millennials need the returns of stocks to meet their retirement goals,” says Bankrate.com chief financial analyst Greg McBride. “They need to rethink the level of risk they need to take.”

Bankrate.com is not the only group trying to push Millennials out of cash and into stocks. Previous surveys have scolded young adults for “stashing cash under the mattress,” being as “financially conservative as the generation born during the Great Depression,” and more being “less trustful of others”—in particular financial institutions and Wall Street. (You can find these surveys here, here and here.)

These criticisms are way overblown. It’s simply not true that Millennials are uniquely averse to equities—many are investing in stocks, despite their responses to polls. As for cash holdings, keeping a portion of your portfolio liquid is simply common sense, though you can overdo it.

Here’s what’s really going on:

  1. Millennials are not much more risk averse than older generations. In the wake of the financial crisis, investors of all ages have been keeping more of their portfolios in cash—some 40% of assets on average, according to State Street’s research. Baby Boomers held the highest cash levels (43%), followed by Millennials (40%) and Gen X-ers (38%). That’s not a wide spread.
  2. Many Millennials do keep significant stakes in equities. This is especially true of those who hold jobs and have access to 401(k) plans. That’s because they save some 10% of pay on average in their 401(k)s, which is typically funneled into a target-date retirement fund. For someone in their 20s, the average target-date fund invests the bulk of its assets in stocks. Thanks to their early head start in investing, these young adults are an “emerging generation of super savers,” according to Catherine Collinson, president of the Transamerica Center for Retirement Studies.
  3. Young adults who lack jobs or 401(k)s need to keep more in cash. Most young people don’t have much in the way of financial cushion. The latest Survey of Consumer Finances found that the average household headed by someone age 35 or younger held only $5,500 in financial assets. That’s less than two months pay for someone earning $40,000 annually, barely enough for a rainy day fund, let alone a long-term investing portfolio. Besides, that cash may be earmarked for other short-term needs, such as student loan repayments (a top priority for many), rent, or more education to qualify for a better-paying job.

There’s no question that young adults will eventually have to funnel more money into stocks to meet their long-term right goals, so in that sense the surveys are right. But many are doing better than their parents did at their age—the typical Millennial starts saving at age 22 vs 35 for boomers. And if many young adults hold more in cash right now because they’re unsure about their job security or ability to pay the bills, there are worse moves to make. After all, it was overconfidence in the markets that led older generations into the financial crisis in the first place.

MONEY retirement income

Need Low-Risk Yield? CDs are Back in Fashion

Dollars and cents
Finnbarr Webster / Alamy

Retirees and other people desperate to earn interest can find respectable deals on certificates of deposit.

Getting low-risk yield has been one of the toughest challenges for retirees ever since the financial meltdown of 2008-2009. Interest rates are near zero, and many retirees are nervous about bonds out of fear that rates might jump.

All of which leaves a simple question: How about a good old-fashioned certificate of deposit?

Retirees desperate for yield can find some respectable deals on CDs. The yields may not sound sexy, but there’s no risk to principal and the Federal Deposit Insurance Corporation protects accounts up to $250,000.

There’s nothing new about the higher rates on CDs compared with bonds. Banks, especially those without extensive retail branch networks, have long offered generous rates on CDs, mostly online, as an inexpensive way to attract deposits. It’s also a way for banks to bring in retail clients who can be cross-sold other higher-margin products.

But there’s an especially compelling case to be made for CDs in the current rate environment.

“For retirees, it’s the one corner of the investment world where you can get additional return without additional risk,” says Greg McBride, chief financial analyst for Bankrate.com.

The most aggressive banks will sell you a two-year CD with an annual percentage yield (APY) of 1.25%; compare that with current two-year Treasury rates, now at about 0.48%. Three-year CDs top out at 1.45%, compared with 0.92% on a Treasury of the same duration. If you want to go longer, five-year CDs top out over 2%.

Five or 10 years ago, the high rates came mainly from smaller no-name banks, but that’s not the case now. Some of the more aggressive offers currently come from big names like Synchrony Bank (formerly GE Capital Retail Bank), Barclays and CIT Bank. Bankrate.com lets you search and compare offers.

You could get higher yields on corporate or junk bonds. But they’re risky because the available yield isn’t adequate for the credit risk you need to take, argues Sam Lee, editor of Morningstar’s ETFInvestor newsletter.

“I’d rather be in a five-year CD than a bond fund taking on more duration or credit risk,” Lee says. “If rates do rise, you can lose a whole bunch of money on long-duration bonds — maybe 10 or 20% of your principal.”

The only risk you face locking in a longer CD — five years, for example — is the lost opportunity cost of obtaining a higher rate should rates jump. Lee likes that strategy.

“The interest rate sensitivity is very low, because you can always just get out and reinvest at a higher rate,” he says. “You’ll pay a bit of a penalty, but that is more than offset by the higher rate and value of the FDIC guarantee.”

McBride isn’t convinced rates will jump substantially anytime soon. “The long-awaited rising rate environment has yet to show itself — it might happen next year, or maybe not.”

Still, you should understand CD penalties in case you do need to make a move, because the terms can vary. The most common penalties for early withdrawal on a five-year CD are 6 or 12 months’ worth of interest, says McBride. “The terms can vary widely — some are assessed just on the amount you withdraw, others on the entire investment.”

If you’re worried about opportunity cost, some of the banks offering aggressive CD rates also have attractive savings accounts that let you make a move at any time – although some require a minimum level of deposit to qualify for the best rates. For example, Synchrony will pay you 0.95%. That’s not much less than the 1.1% it pays on a one-year CD – or the 1.2% for a two-year CD, for that matter.

The other option is a step-up CD that boosts your rate if interest rates rise in return for a lower initial rate. But those aren’t easy to find right now, McBride says. “We’ll see those become more prevalent if we get into a rising rate environment.”

No matter how long you go, Lee says, the implication for retirees is clear: Use CDs for the risk-free part of your portfolio and equities for whatever portion where some risk is acceptable.

Equities should help keep your overall portfolio returns substantially above the rate of inflation. The Consumer Price Index is up 2.1% for the 12 months ended in May.

“The U.S. stock market’s expected real [after-inflation] return right now is about 4%,” he says. “The expected inflation-adjusted yield on bonds right now is close to zero.”

MONEY retirement planning

Leave a Financial Legacy? Boomers and Millennials Slug It Out

Unlike older Americans, young adults want to leave an inheritance to future generations. Too bad they're investing in cash.

Baby Boomers like to point out that our famously self-absorbed generation advocated for many good causes as youngsters and turned the corner to greater giving in retirement. Much of it is true. But younger generations are way ahead of us, new research suggests.

Maybe it’s a case of our kids doing as we say, not as we do. Boomers are the least likely generation to say it is important to leave a financial legacy—even though they have benefited from an enormous wealth transfer from their own parents, according to a new U.S. Trust survey of high net worth individuals. How’s that for self-absorbed?

More boomers have received an inheritance (57%) than say it is important to leave one (53%). The opposite holds true for younger generations. Some 36% of Gen X and 48% of Millennials have received some type of inheritance while 59% of Gen X and a whopping 65% of Millennials say it is important to leave one.

Circumstances may account for the difference in mindset. The Great Recession struck just as boomers were preparing to call it quits. With more to lose, and little time to make it back, boomers suffered the worst of the crisis from a savings point of view. A financial legacy seems less important when you are downsizing your retirement dreams.

For younger generations, the crisis created an employment nightmare. But it drove home the need to begin saving early, and those that did have seen stock prices double from the bottom and house prices begin to rebound as well. Millennials’ problem may be that they still don’t trust the stock market enough.

Well more than half in the survey remain on the sidelines with 10% or more of their portfolio in cash. Millennials are the most likely to be tilting that direction. Two-thirds of Millennials, the most of any cohort, say they are fine carrying a lot of cash and just 13%, the least of any cohort, have plans to invest some of their sideline cash in the next 12 months. This conservative nature threatens to work against their desire to leave a financial legacy—or even retire comfortably.

Millennials are the youngest adult generation and have the most time to absorb bumps in the stock market and benefit from its long-term superior gains. Intuitively, they know that. In the survey, those holding the most cash, regardless of age, were the most likely to say they missed the market rally the past few years and are not on track to meet their goals.

In our younger days, boomers rallied around things like civil rights and workplace equality for women, among other grand moral battles. But we didn’t necessarily put our money where our mouth was. Today’s young adults are quieter about how to fix the world. But they are willing to invest for change. One-third of all high net worth individuals invest in a socially conscious way while two-thirds of Millennials do so, U.S. Trust found.

By a wide margin, more Millennials say that investment decisions are a way to express social, political or environmental values (67%). Most (73%) believe it is possible to achieve market-rate returns investing in companies based on their social or environmental impact, and that private capital from socially motivated investors can help hold public companies and governments accountable (79%). I’d say the kids are alright.

MONEY Saving

WATCH: Tips From the Pros: The Secret to Financial Success

Financial experts reveal the one thing you must do to build wealth.

TIME U.S.

The Rich Guy Who’s Been Giving Away Free Money May Be Heading to Your City

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Getty Images

If you live in New York, Las Vegas, Houston, Chicago or Mexico City, get ready for a scavenger hunt

Last month we reported that an anonymous real estate magnate (who has since been outed as Bay Area resident Jason Buzi) was giving away free money in San Francisco. Using the Twitter handle @HiddenCash, Buzi shared clues that ultimately directed people toward crisp white envelopes stuffed with bills.

Well, this weekend Buzi’s expanding his operation across North America. He shared his itinerary on Twitter:

If you hope to score some dough, be sure to pay close attention to Twitter, because the second Buzi provides any information, you’ll need to act fast. Buzi isn’t just doling out free money, though. He’s also doling out free life lessons:

(h/t Business Insider)

MONEY freebies

Free Money! @HiddenCash Scavenger Hunt Spreads

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Hundreds of people search for 36 buried plastic Angry Bird orbs filled with hidden cash in Hermosa Beach, California May 31, 2014. They were following clues posted via the Twitter handle @HiddenCash. Jonathan Alcorn—Reuters

The Twitter-based scavenger hunt @HiddenCash, in which clues lead to envelopes stuffed with money, is spreading to several big cities this weekend.

Talk about “found money.” It’s not every day that some anonymous philanthropist decides to give away thousands of dollars to total strangers via a social media-coordinated scavenger hunt. So when the @HiddenCash hunt came out of the blue a couple weeks ago in San Francisco, it understandably drew worldwide attention.

Coming this weekend, people outside the San Francisco Bay area can also join in the fun. The man behind HiddenCash—he’s a Palo Alto-based real estate investor named Jason Buzi, and he was outed over the weekend—appeared Anderson Cooper’s show on CNN on Monday night and revealed that the game-hunt will take place this weekend in Chicago, Houston, Las Vegas, New York City (Brooklyn and Manhattan), and Mexico City. The cash hunts are also due to hit Paris, London and Madrid by the first week of July. A @HiddenCash Tweet went out this morning spreading the word:

While the HiddenCash phenomenon is intended to be fun, Buzi was also motivated to create the hunt for the purposes of spreading the wealth in a world rife with income inequality. As the then-anonymous Buzi told TIME via e-mail a couple weeks ago:

“My message for the ‘haves’ is to be a little more generous, and to give back more,” HiddenCash adds. “I know so many wealthy people who are selfish and greedy, and just want more, more, more. When is it enough? When will you be satisfied? Take a step back, relax, and give back a bit. Putting smiles on other people’s faces will put a smile on your face. Believe me.”

Buzi told CNN that he’s already given away $15,000 in cash, and he’s planning to give away a lot more in scavenger hunts this summer.

MONEY stocks

How Owning Apple Stock is Now Like Owning Bonds

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Inside Apple's balance sheet is a whole lot of cash and bonds. Jesus Jauregui—Getty Images

Apple's stock split makes it easier to buy. But you'll get a big bond fund as part of the bargain.

By splitting its shares 7-for-1 today, Apple has made its stock more easily accessible to retail investors. But of course if you have any money at all in an equity mutual fund, you almost certainly own a chunk of Apple APPLE INC. AAPL 0.4249% . The stock is 3.11% of the S&P 500 S&P 500 INDEX SPX 0.6111% , making it the biggest name in the index.

What you get if you own Apple is, of course, a world-beating consumer technology company. But you also get a huge chunk of cash and bonds—about $150 billion worth, or 27% of Apple’s total market value. One way to wrap your head around how much extra money Apple is managing is to compare it to the biggest bond mutual funds in the country. If Apple’s fixed-income portfolio were a fund, its only real peers would be the giant Pimco and Vanguard portfolios, the mainstay core holdings in many 401(k) plans.

Source: Morningstar, Apple
Source: Morningstar, Apple

If you’ve ever scratched your head and wondered why investors complain about Apple’s cash, as if being wildly successful at pulling in profits is a bad thing, this is why. If you have money to put in the market and wanted some of it to go into bonds, you could hand that money over to Pimco and Vanguard and get a reliable return. No one needs Apple CEO Tim Cook to be a bond manager.

Cook knows that, which is why Apple has announced it plans to return $130 billion in cash to shareholder via dividends and stock buybacks by the end of 2015. Of course, even if it does that, it would still have loads of cash on hand—the company generated about $36 billion in cash flow from operations in the six months ended March 31. That alone is enough to do twelve more Beats-sized deals. (One odd wrinkle: To get cash back to shareholders, Apple is actually borrowing. It’s a tax thing.)

Bottom line: If you buy Apple today, between now and the end of next year, you’ll get a lot of that money back and will have to figure out somewhere else to invest. Another portion will earn modest returns. And then you hope the rest is invested back in the business or in smart acquisitions in a way that continues to power growth forward. Shawn Tully over at Fortune.com thinks Apple is just too big to deliver the kind of growth Apple fans hope for. Then again, if you subtract Apple’s “bond fund” from its market value, you get the part of the business that’s still a tech company for about 11 times the past year’s earnings, compared to just under 20 for the S&P 500. Assuming you think Cook won’t waste the cash, that doesn’t sound like such a terrible deal.

MONEY Odd Spending

There’s Probably No Cash in Your Wallet. Could That Cost You?

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Nikola Bilic—Alamy

If you walk around with little or no cash, you're in the majority. But choosing plastic over cash for everyday purchases could mean you'll spend more in the long run.

According to two recent surveys, the majority of consumers walk around with little or no cash. Most prefer plastic for the sake of convenience and safety. There could be an unfortunate side effect, however, based on the theory that people spend more when making purchases with credit or debit cards rather than cash.

Last week, VoucherCloud, a UK-based deals and coupon site, released the results of a survey of 2,341 Americans indicating that “over half of American citizens (57%) ‘never’ carry cash, instead relying solely on credit and debit cards to pay for their daily expenses.” Only 10% of survey participants said that they “always” carry cash, and another 33% said that they carried cash “rarely” or “sometimes.”

Could this be true? Do the majority of American adults you pass on the street really have empty wallets? There’s reason for skepticism. Let’s start with the question that prompted the responses: “How often do you carry cash with you on an everyday basis?” Many may read this question as essentially asking, Do you always carry cash? That’s different than asking if you usually keep a few greenbacks in your pocket.

What’s more, another recent survey, from Bankrate, focused on the same subject but ended up with very different results. In its survey, which asked, “How much cash do you usually carry on a daily basis?” Bankrate found that only 9% selected the option “Don’t carry cash/does not apply.”

There’s no denying that folks carry a lot less cash than they used to. According to Bankrate’s data, more than three-quarters of people generally walk around with $50 or less: 40% usually have less than $20 on hand, 29% say $20 to $50, and 9% typically go cashless (or “does not apply,” whatever that means).

In both surveys, participants said they felt safer that way. The top reasons given in the VoucherCloud survey were “concerns over safety and the risk of theft” (65%) and “risk of losing my wallet and/or its contents” (53%). Women tend to carry less cash than men—77% of female respondents said they keep $50 or less handy, versus 61% of men—perhaps owing to the fact that women “may prefer to carry less cash than men so as to reduce the risk of being a target for criminal activity,” according to Bankrate chief financial analyst Greg McBride.

As for whether it’s wise to carry little or no cash, the surveys come to very different conclusions. When asked, “Do you spend more or less when paying by card instead of cash?” 84% of VoucherCloud respondents said they do more damage when spending with plastic. “While using payment cards rather than cash is a widespread modern phenomenon, because it is so quick and convenient, it can become a dangerous trend for some of us!” VoucherCloud’s Matthew Wood warned. “It’s much harder to keep up with what you’re spending as you don’t see the money leave your hands and, because it’s just a little piece of plastic, it doesn’t feel like a real exchange. It’s easy to get carried away.”

There’s plenty of research out there to back up this theory. Generally speaking, the idea is accepted that handing over cash feels more tangible and “hurts” more compared to quickly swiping a card. Many budget and personal finance experts recommend going cash only and maybe even freezing credit and debit cards in a block of ice as a strategy to limit one’s spending.

The Bankrate study, on the other hand, makes the argument that people today think of any cash as “petty cash” that will inevitably be spent quickly and carelessly. So it stands to reason that people don’t want to carry around too much. “If you’re carrying more, maybe you feel you have more, and you feel you spend more easily,” Joydeep Srivastava, a professor of marketing at the University of Maryland, told Bankrate. To many consumers, cash on hand is as good as cash spent. “As soon as you draw it from the ATM, it’s like you’ve already spent it,” said Srivastava. “You don’t feel that pang of guilt of spending it anymore.”

So which theory is true? If you’re trying to avoid unnecessary spending, should your primary mode of paying be plastic or cash? And by extension, is it best to carry lots, some, or no cash? The truth is, the answers probably vary a lot from person to person.

If you’re the type who is constantly piling up credit card debt or getting hit with overdraft fees on a debit card, it may be time to put the plastic on ice and limit yourself to cash-only expenditures. And it’s probably best to try to plan out your daily expenses and limit how much cash you carry around. Because if you have more cash than you need, you know you’ll just spend it.

TIME Social Media

An Anonymous Real Estate Magnate Is Giving Away Cash on Twitter

Forrest Hanson holds up the $100 in cash he found on San Francisco's Baker Beach over Memorial Day Weekend in an online scavenger hunt. Courtesy Forrest Hanson

@Hiddencash has given away more than $5000 in San Francisco after dropping hints on Twitter -- and plans to give even more

Free money has never come this easy: Alexzandra Etherton found $68 in an envelope taped to a parking meter. Matthew Burkert found his stash hidden under a bulldozer. And Forrest Hanson nabbed $100 on San Francisco’s Baker Beach on Memorial Day, then paid it forward by giving it away to other passersby.

Since last Thursday, an anonymous twitter user known only as @HiddenCash has been giving away thousands of dollars in the city by the Bay to the delight of the dozens of people who followed HiddenCash’s clues on Twitter and found the coveted white envelopes. The hints aren’t terribly subtle — one that said the money was at a bar that Tony Hawk would love directed hunters to “The Ramp” (duh!) — and because there are so many people on the lookout, the prizes have been getting snapped up within minutes.

Nobody knows exactly who HiddenCash is, but the anonymous philanthropist tells TIME in an email, “I have made my fortune in real estate, and have been able to accumulate multiple properties, whereas so many people can’t afford to buy a house or even a small condo in San Francisco. People who work just as hard or harder than me. So I wanted to give back … But I also wanted to do something that would give back in a fun way, and get people involved.”

“My message for the ‘haves’ is to be a little more generous, and to give back more,” HiddenCash adds. “I know so many wealthy people who are selfish and greedy, and just want more, more, more. When is it enough? When will you be satisfied? Take a step back, relax, and give back a bit. Putting smiles on other people’s faces will put a smile on your face. Believe me.”

HiddenCash’s advice for the rest of us is a bit more sobering, however: “If you are broke and struggling, please don’t look to @hiddencash or a lottery ticket to be your salvation … Relying on games of chance is probably the worst and least responsible thing you can do.”

With more than 50,000 followers amassed in less than a week, now HiddenCash says it will go nationwide and tells TIME the plan is to give away a total of six figures. A new drop is promised in San Jose on Wednesday and its first in Los Angeles is slated for this weekend. Get ready for the stampede.

TIME Law

A Marijuana Bank for Colorado? Not Right Now

The marijuana business in Colorado is having serious problems finding places to put the vast amounts of cash it earns. Weed firms have struggled to find a way to handle the cash they make, because the funds are derived from a substance that remains illegal under federal law

An attempt to create a banking system for Colorado’s now legal marijuana businesses survived only a few hours before being effectively killed off Thursday.

The plan, which would have created a credit union for pot-related businesses unable to gain access to the regular banking system, cleared a state legislative committee early Thursday, paving the way for the world’s first financial system for the bud trade.

However, another committee killed the plan shortly after by amending the bill to require Colorado to keep trying to find a way for the marijuana businesses to enter mainstream banking.

Marijuana firms in Colorado and Washington state, the two states that have legalized pot for recreational use, have struggled to find a way to handle the large amounts of cash they make, because the funds are derived from a substance that remains illegal under federal law.

In February, the Justice and Treasury departments issued guidance suggesting that banks could offer basic services to marijuana dealers, but financial institutions remain wary. Consensus is growing that it will take an act of Congress to change the situation.

“I have long said the issue cannot be solved at the [state] capitol, and I don’t hold the current Congress in high esteem to get anything done,” the bill’s co-sponsor Pat Steadman told the Denver Post.

“But this bill would lay it squarely at their feet and force the conversation.”

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