How Millennials Can Build Wealth
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Millennials have been dubbed âthe lost generationâ because of their lag in creating wealth compared to older generations at this point in their lives. The Federal Reserve Bank of St. Louis has indicated that Millennials (especially those born in the 1980s) will accumulate less wealth over their lifetimes in general.
These predictions follow the collective experience of adverse macroeconomic trends and economic instability that the generation has faced. It’s safe to say that Millennials, who are between the ages of 26 and 40, have had a far from smooth navigation when it comes to building wealth.
Much of Millennials graduated from college at the onset of the 2008 financial crisis and suffered the brunt of an economic downturn just as they entered the workforce. The past decade has seen a widening wealth gap, with younger generations clustering at the bottom of the ladder. Much can be blamed for rising inequality: the debt burden of student loans, the rising cost of living, high housing costs, and stagnant wages. Now largely in debt and delayed in building their careers, being a millennial is almost synonymous with money anxiety.
The economic fallout from the Covid-19 pandemic has again presented many millennia with more financial hardship and ushered in a different kind of crisis – growing collective discontent leading to what many are calling the ‘Great Resignation’. These events threaten to deviate this generation from wealth creation for good.
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But there is still time to catch up. Millennials had gradually started to recover from the struggle a decade after the 2008 economic crisis. As early as 2018, research by the Pew Research Center showed that working adults of this generation earned more than youth households. adults in the past 50 years. One of the reasons for this growth in household income was that millennial women worked more and were paid more than women in previous years.
Although millennials have suffered another setback, largely due to the economic fallout from the Covid-19 pandemic, if previous recoveries are any indication, they may catch up.
Tips on How Millennials Can Build Wealth
Regardless of setbacks, build wealth and have enough retirement savings are not elusive for millennials. Reports have already started to show that older millennials are among the biggest spenders in the economy and are poised to accumulate significant wealth. But what is wealth and how does it play into an individual’s financial security? Simply put, wealth (or equity) is the total value of assets (i.e. real estate, cash, stocks, etc.) owned by a person, minus any debts or liabilities (i.e. i.e. student loans, mortgage, etc.). Wealth helps determine your quality of life now and after you retire. And it usually takes a long time to build.
For younger generations, after subtracting expenses like rent and student loan payments, there is very little or no income left to set aside for saving or investing. But all hope is not lost. Even with little cash on hand, there are still ways for millennials to start building wealth and planning for a sustainable retirement.
Harness the power of composition
Younger people have a huge advantage: time. With this, they can harness the power of composition.
The basic compound interest formula is the addition of interest on the principal sum plus any interest already earned on it. For example, suppose you put $ 1,000 into a bank account paying an annual interest rate of 5%, at the end of the year your $ 1,000 becomes $ 1,050. $ 1,050 at 5% is $ 1,103, which at 5% is $ 1,158. So after 3 years, you go from $ 1,000 to $ 1,158 just by letting it sit and dial.
By putting your money in a compound account, you are making your money work for you. This is just one example, as you will be hard pressed to find a bank that will pay you a 5% interest rate, but if you invest it in the market, you might get higher returns. However, the idea is to start small and grow your money over time.
High yield savings accounts offer higher interest rates than traditional savings and chequing accounts. The concept of compound interest also works with investments.
Exchange Traded Funds as a Wealth Creation Tool
For those who want to invest but don’t know where to start, it is always possible to start building wealth using exchange traded funds. An exchange traded fund (ETF), similar to an index fund, is a compilation of a series of stocks and / or bonds and is an investment tool that allows you to invest in the market as a whole. .
When you buy an ETF, you are often buying a group of large companies. For example, you can buy an ETF that tracks the S&P 500. If you put $ 100 a month (or more if you can afford it) in an ETF and don’t touch it, then $ 100 a month equals 1,200 $ per year, which is starting to become more tangible.
Additionally, over time, the value of ETFs themselves will increase, especially those that track the entire stock market. The market goes up and down, but it is going up in the long run. For example, the S&P 500 has historically generated an average annual return of almost 10% over the years (remember that future returns are not guaranteed).
The Schwab brokerage account allows you to buy and sell ETFs and stocks without a commission, including funds that track the S&P 500.
Robo-advisors, like Wealthfront and Betterment, can help you build wealth with a hands-off approach. They will create a portfolio of low cost ETFs and index funds based on your risk tolerance, investment goals and time horizon. Additionally, robo-advisers will rebalance your portfolio over time based on your goals and market conditions. And if you’re looking to build wealth for your retirement, Wealthfront and Betterment offer Traditional and Roth IRAs.
Think long term for your career
Gallup reports that over 36% of the U.S. workforce, or roughly 57.3 million people, participate in the concert economy, and that millennials make up the largest portion of concert workers (42% in 2020). As more millennials value their self-reliance and traditional full-time jobs with benefits become harder to find, the odd-job economy is expected to continue to grow.
There are many advantages to being self-employed, but there are also its disadvantages, some being the fickle nature of your income source and the lack of perks like a 401 (k) and health insurance. There is less financial security for freelancers and workers in the odd-job economy.
To have any chance of building wealth, freelancers must not only work for themselves, but also start a business. Many freelancers are “solopreneurs” living from invoice to invoice
Heather Purcell, a financial management expert who works with creative companies, expresses her concern. âI work with business leaders who regularly deal with many freelancers and receive invoices for the work done by these individual entrepreneurs. What I have noticed is that none of these freelancers are working to create a sustainable business that can be run independently of them and their time. What happens when you don’t want to sell your time anymore? Where does the money come from after you retire? ”
She advises freelancers to focus on building businesses that can create a more financially stable future, even if that means getting paid less now. âI have a millennial client who is looking to the future and starting a business. They are paid less in the short term so that they can pay employees and create systems that can operate independently of them. “
Taking a pay cut now and putting that money back into your business or an investment account can help build long-term wealth. Money is good if you’re a successful freelance writer or independent entrepreneur, but it offers a mirage of value that doesn’t hold up when you retire. Millennials need to think long term and create systems and businesses that can operate independently of them.
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Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.