Converting High Income into Lasting Wealth
It’s become something of a reliable attention-getting headline that Millennials struggle to get ahead and create wealth, despite six-figure salaries, and even when there are dual incomes. There's more to it.
The focus is usually on the spending and lifestyle habits of a new generation coming into its own. The data tells a much different story.
Wealth in 2016 of the median family headed by someone born in the 1980s was 34 percent below the level experienced by earlier generations at the same age.1 Over the last three years, positive conditions have narrowed that gap to 11%.2 But it’s still a big gap, and since these are older Millennials, they have less time to further make up the difference. Fortunately, there are some positive life/work trends that can help, and the prospect of a strong economy as well as an evolving investment management landscape may help this generation leap ahead.
A New Way to Look at Tracking Spending
Making and keeping a budget is the core of creating wealth. If you don’t have anything left after expenses, you won’t have anything to invest and grow. That’s not new. The new part is that budgeting doesn’t have to be onerous, and it definitely doesn’t have to make you feel deprived.
Technology has not only simplified budgeting, but it has also helped to bring some of the principles of behavioral finance – why you do what you do with money – into the game. Budgeting software has developed to the point that it can zero in on where and what an individual struggles with – and provide tools to help fix the problems and get budgeting on track.
There are free apps, like Mint, that provide a comprehensive look at organizing your finances. If you want to get a little deeper, apps like You Need A Budget (YNAB) can change your view of how you spend. The process works under the principle of assigning every dollar a job, and one of the goals is to help you get out of debt. If overspending is a problem, there are apps that are more suited to helping out with that. With a little online research, you’ll be able to find some budget tech that is the best suited for your situation.
Minimizing the Big Expenses
For most people, by the far the biggest monthly expense is housing, whether you own or rent. This was also the most constrained – living in expensive communities to be close to knowledge-worker jobs was just the reality. It’s different now. The pandemic has normalized working-from-home to the point where it’s likely to remain long after the COVID has receded.
Picking up stakes no longer requires multiple expensive trips to check out new communities and houses. Now it can all be done online. Moving can lower costs in three ways. It can result in lower state and local taxes; less-expensive housing stock can mean paying less for monthly housing costs; and many communities can offer an amenity set that includes great public (or private) schools and other benefits that can lower lifestyle costs. If you decide you don’t want to own, the housing market has changed. Single-family rental homes are often newer, bigger (3+ bedrooms) and offer green technology and other benefits. If you do own, selling a primary residence may mean you are entitled to a tax exemption. You may also choose to hold onto your existing home and rent it out, essentially converting it into an investment property. While it can get complicated, when you do sell you may be eligible for a 1031 exchange in which you essentially roll over the profit on your existing real estate into another asset of equal value. This can be a way to build a real estate portfolio that provides you with another source of income.
Investing Is Now Investor-Centric
Today’s investors have a landscape that is different in so many ways – there are more investment products available, and many of them are alternatives that were previously only able to be deployed by institutions and ultra-high net worth investors. In addition, using your investments to express your values is something that entire portfolios can be structured around. The biggest change, however, is in the industry itself. Over the last ten years we’ve seen a shift towards a fiduciary model of investment management that requires the advisor to put the client’s best interests first. This has given rise to a trend of smaller, client-centric independent investment advisors who can offer comprehensive planning tailored to what clients needs and where they want to go – not just to the bottom line of their assets.
Wrapping it Up
The Millennial generation has faced considerable challenges, but they continue to blaze new trails and redefine their lifestyles and what’s important to them. Taking a fresh look at a financial picture can help to narrow the wealth gap and keep things on track. For many millennials, engaging with a financial professional may be low on the list of priorities, however, working with a true fiduciary wealth planner can not only help a young professional identify strategies to begin growing and retaining wealth, but can serve a critical role in accountability to sticking with the plan over time.
A Lost Generation? Long-Lasting Wealth Impacts of the Great Recession on Young Families. 2018 Study. The Federal Reserve Bank of St. Louis.
Hernandez-Kent, Ana and Ricketts, Lowell R. Millennials Are Catching Up in Terms of Generational Wealth. The Federal Reserve Bank of St. Louis. March 30, 2021.
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