If you’re a millennial, chances are you’re well aware of the importance of saving your hard-earned dollars. However, you’re also likely saving the wrong way — costing you thousands of dollars each year.

The word “saving” for most evokes the idea of a savings account. But, for millennials who have a long time-horizon, an integral part of planning for the future should include not just saving but–critically– investing. Unfortunately, a recent Fundrise survey revealed that 40% of millennials aren’t investing today at all – meaning they’re most likely holding onto their cash. Cash is arguably one of the best ways to take advantage of a pullback in the stock market. However, over the long run inflation depletes its value, meaning that excessive cash holdings can put your financial future in jeopardy. While cash may feel safe to own, it is the one asset class that’s virtually certain to lose value each year.

For those who do invest, stocks are a common choice. Investors in the Fundrise poll ranked stocks last when asked what Investment is best-suited to withstand a financial crisis. However, most investors remain over-allocated to this expensive asset class. Stocks and other publicly traded investments are generally priced at a 20-30% premium to their private counterparts due to the ability to sell them at any time. This optionality may seem appealing, but when you consider the added cost, and the fact few people really need to trade out of their investments on a frequent basis, the downsides to owning a portfolio comprised entirely of public securities typically isn’t worth the benefits. Moreover, a basket of just stocks and bonds lacks sufficient diversification to properly mitigate risk in a downturn.

Without awareness and effective planning, millennials are forfeiting potentially valuable passive income streams. This puts many young people on a path toward financial instability for years to come.

It’s time for millennials to start breaking the piggy banks and putting their money to work in the right ways.

Planning for your financial future

The simplest way to begin to improve your financial situation is to take advantage of a company-provided Retirement plan. If this option isn’t available to you, setting up a self-directed IRA is a smart and easy way to start saving for retirement.

Based on U.S. Census Bureau data, the national average retirement age in the United States is 63 years old. This means that approximately 40 years of work are needed to save for retirement on average. Some investors may try to retire early by dialing up the risk of their investments, and therefore the expected potential returns. However, IRA accounts provide an opportunity for investors to pocket more money without any increase in risk. This course may boost take-home returns earned and help reduce the number of working years needed to retire comfortably.

What’s the downside? To compensate for tax advantages, the U.S. government imposes restrictions on withdrawing money from an IRA account prior to retirement age or certain qualified events. To maximize the benefits of an IRA account, funds must be kept in the account until retirement.

One common frustration with IRA funds is illiquidity. However, when paired with an alternative investment, such as real estate investments, this is in fact their greatest benefit. Investors who go this route will find that they not only enjoy the tax advantages, they will also have the opportunity to earn potentially higher take-home returns over the long run. Self-directed IRA companies today enable investors to diversify retirement funds and allocate savings more efficiently in a centralized account.

Benefits of a long-term financial outlook, and where to start

Once you have a steady stream of payments routinely dedicated to your retirement fund, your next focus should be on building a diversified portfolio. This means spreading out your funds across public and private investments in different asset classes with varying time horizons — not just buying a bunch of different stocks and bonds. With recent advancements in financial technology, it’s never been easier to build a portfolio of private and public investments, whether you’re using a retirement fund or a taxable account.

As Co-founder and CEO of Fundrise, I believe all investors should allocate at least 30% of their portfolios to private assets. By diversifying into the private market, in addition to public stocks and bonds, millennials (as well as other generations) can mitigate risk and help protect themselves from a potential downturn in the future. Public investments tend to be highly correlated to the broader market, and therefore their prices are often more volatile. This means that when there are bad headlines, public asset prices are more likely to fall, even if the news is unrelated to asset fundamentals. In contrast, private investments tend to suffer less from negative market sentiment, as prices are determined by objective fundamental factors.

I can say from experience that taking a long-term approach through private alternatives can also mean cutting 20-30% of upfront costs built into your purchase price. I never understood why so many people put all of their retirement money in stocks for this reason. Why pay 30% more for something priced to sell tomorrow if you intend to own it for 15 years? The math just doesn’t make sense.

Conclusion

By setting yourself up with a retirement fund, like a 401K or IRA, and a diversification strategy including private assets, stocks, and bonds, you’ll be doing significantly more than the average millennial, and giving yourself a fair shot at a successful financial future.

At Fundrise, we make it easy to invest directly into a diversified, professionally-managed portfolio of institutional-quality private real estate investments. Through our platform, we have democratized access to the once-unattainable benefits of private market investment options. Rather than choosing from the leftovers of big institutions, who generally get first access to the best opportunities, investors benefit from the institutional scale of the Fundrise investor base.

Fundrise provides quality private market diversification that is crucial in building a portfolio with low volatility and correlation, as well as the potential for higher returns.

If you plan with a long-term financial outlook now, you will thank yourself down the road.

Ben Miller is Co-Founder and CEO of Fundrise. With over 18 years of commercial real estate experience, Mr. Miller is an innovator and champion for the everyday investor, focusing on the Fundrise mission to democratize access to real estate investing. Stay up to date with the latest from Fundrise through their social channels: Facebook, Twitter and LinkedIn.

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