If you take everything the media says at face value, you might think young people — and especially millennials — are hopeless when it comes to money.
News outlets and major publications constantly paint millennials as entitled freeloaders who would rather beg for scraps than work for what they want.
They’re all living in their parent’s basements and struggling to find well-paying jobs with their liberal arts degrees, right?
These stories make for a sexy headline, but that doesn’t mean they’re the norm. The portrayals the media sells about today’s young adults aren’t always accurate, and some may even say they’re dangerous.
The idea that young people are destined to earn less than $40,000 per year and work until they die has the potential to convince people that they shouldn’t even try. If you’re set up to fail anyway, why bother?
Now, here’s the good news. Regardless of how much you’re earning right now and whether you’re struggling with underemployment or student loan debt, you can start building wealth — right now.
Here’s exactly how to do it, step-by-step:
Step 1: Boost Your Retirement Contributions
Today’s youth may be facing a tough job market and rising student debt, but they do have one factor working in their favor. They have time, says financial advisor Anthony Montenegro of The Blackmont Group in Orange County, California.
“Time is a key factor in wealth building because it allows you to take advantage of compounded returns,” he says. Further, the impact of compounded returns augments your wealth building capacity. Obviously, having more time for your money to grow is a distinct advantage over say, starting to save for retirement at age 55.
That’s why, no matter how much you’re saving for retirement already, you should strive to ratchet it up more each year. Doing so can help you save without any effort, take advantage of compound interest, and reduce your taxable income. Heck, you may even earn an employer match on some of your retirement contributions, so make sure to check.
Financial advisor Jose V. Sanchez suggests increasing your 401(k) or any other retirement contributions up by 1% each year until you’re eventually maxing them out. However, you may be able to boost it more — at least this first time.
Increase it by whatever percentage you can get away with, and you may be surprised by how little your take-home pay changes in the end. Also remember that you can build wealth for the future in other ways, including opening a traditional or Roth IRA.
Step 2: Invest for the Long Haul
Financial advisor and President of AssetDynamics Wealth Management Don Roork says that, based on his experience, investors in their 20’s are subject to emotion driven money mistakes just like their parents. In other words, they are prone to make poor investing decisions when the market behaves badly — or even when they hear a rumor that it might.
To guard against emotional decision-making, Roork suggests creating a plan and sticking to it. Remember that, historically, markets fluctuate over time and volatility is normal. Consider building a diversified cost-effective ETF or mutual fund portfolio using a rules-based investment process — then leaving it alone.
“Don’t allow your emotions to drive your investment decisions,” says Roork. “Start this in your 20’s and you’ll be miles ahead of those who panic sell at the first sign of the next inevitable market correction.”
Step 3: Allocate Raises and Windfalls
You will likely earn more money over the course of your career — even if it seems like the income you crave is decades away. While you’ll probably want to improve your lifestyle as your income grows, experts say it’s important to make sure at least some of your raises and windfalls are set aside for the greater good.
Sanchez suggests a 50/50 strategy that can help you enjoy the spoils of your hard work while also getting ahead. Anytime you get a raise, he says, you are best to split it up into two separate buckets —one for now, and one for later.
“Half goes to you to spend on whatever you choose,” he says, and “the other half goes to your future self in your retirement savings.”
This strategy can compound on itself over time as you score more pay at work and more windfalls land in your lap. Not only should you allocate any raises you get this way, but you should split up tax refunds, workplace bonuses, and other “surprise” money you receive as well. Over time, these sums — and the interest you earn on them — can add up in a big way.
Step 4: Build Emergency Savings
A 2018 report from the U.S. Federal Reserve showed that 40% of Americans don’t have $400 to cover an emergency expense. With this statistic in mind, it’s no wonder so many people fall behind on bills or rack up credit card debt when they lose their job, face a loss in income, or become gravely ill.
If you want to build wealth, you must make sure you’re protected against life’s “what ifs.” This includes saving for emergencies that could throw your financial plan out of whack if you let them. Most experts suggest keeping at least three to six months of income in an emergency savings account, but even a few thousand dollars is better than nothing. Whatever you do, start saving something each month so you’re facing financial hardship if something goes wrong.
To make your money grow faster, make sure you put your emergency fund in an account that is separate from your regular checking and savings. That way, you’re not tempted to spend it. Also make sure your funds earn interest so they’ll grow on their own as you continue adding money. Many of the best online savings accounts offer 2.0% APY or more for qualified accounts and short-term CD rates have also been increasing.
Step 5: Pay Down Debt (and Stop Adding New Debt)
It’s easy to focus so much on building wealth that you forget to factor in your debts. Keep in mind that the average credit card APR is now over 17% — and remember, that’s the average card. Many credit cards charge an annual percentage rate of 24.99% or more!
If you’re carrying credit card debt at a crazy-high interest rate, the best thing you can do is pay it off right away. After all, paying off high interest credit card debt can help you save huge sums of interest that you can turn around and invest.
Also make sure you’re not adding to the pile. Racking up credit card debt to the tune of 17% APR or more makes little sense when you’re trying to build wealth.
The bottom line: Pay off debt as quickly as you can, start using a budget, and learn to live within your means. This advice isn’t sexy at all, but it will help you grow your net worth and your wealth over time.
Step 6: Give Up the New Car Smell
According to research from Experian, the average new car loan rang up to $31,455 in July of 2018. That translates into car payment of $523 each month, which is an absolutely insane amount of money to spend on a vehicle. This amount also doesn’t include the cost of license plates, auto insurance, gas, or maintenance and repairs.
So many young people mistakenly believe they need a new car every year. This ultimately leaves them building lifestyles around ridiculous car payments that make them poor. For that reason and others, I would even say that car payments are the worst roadblock to wealth in existence.
Also remember that cars depreciate in value at a rapid pace. That $31,455 car you bought a few years ago will eventually be worth almost nothing — even if it had smooth leather seats and rode like a pat of butter down the highway. Once it’s eight or nine years old, you’ll wind up selling it on Craiglist and regretting your life choices. There are almost no exceptions to this rule.
You can see where I’m going with this, right? If you want to build wealth, you need to jump off the new car train – and stay off. You don’t have to drive an old beater, but you don’t have to buy new. Consider buying a car that’s a few years old and still has plenty of life left. Better yet, stick with cars you can afford to pay for in cash.
Imagine what having another $500 per month to invest each month could do for your bank account. Better yet, play around with a compound interest calculator to find out.
Spoiler alert: If you saved $500 per month from ages 25 to 40 and earned 7% APR, you would have $150,774.
The Bottom Line
The media wants you to believe everything is working against you, and in some ways they’re right. But you still have some control — especially when it comes to how you allocate and invest the money you earn.
If you take my advice, the steps listed above will help you land a lifetime ahead of your peers in the end. Do you want a smooth ride to retirement or a life filled with struggle and regret?
The choice is yours and you have the privilege of making it now — while time is still on your side.
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