Millennials have been struggling to generate wealth when compared to previous generations, with the average Baby Boomer holding up to 7x the wealth of Millennials at the same age.
Add in the pandemic, and financial futures of “the unluckiest generation in U.S. history” are grim. According to a recent survey from Deloitte, two-thirds of Millennials “often worry or get stressed” about their financial situations, and only 36% of Millennials believe their financial situations will improve by 2022.
So how can Millennials accumulate wealth when the odds are stacked against them? While it may not be easy, the formula for building wealth is simpler than most people think and it starts with being informed.
The only way to build substantial wealth is to invest in financial assets — not by saving money.
Let’s look at an example. If you earn $100,000 a year, you will take home approximately $70,000 a year after taxes. Assuming you’re renting a reasonable apartment in a major city, you’re looking at spending at least $25,000 a year on rent — plus the $20,000 average cost of bills, utilities, loan repayments, etc.
Assuming you only spend a meager $600 per month on food, or $7,200 yearly, that leaves you with $17,800. If you factor in transportation, healthcare, and personal care you’re likely to have only about $10,000 to save per year. Repeat that year after year, and it will take you 100 years to save $1 million.
Plus, you have to actually have a six-figure salary to support this trajectory, which is a big jump from the $31,000 median income in the United States. This means it’s simply not possible for the average American to build real wealth through savings alone, at least not in their lifetimes.
So, what assets should you invest in?
Firstly, you should reframe how you think about money. Money is a tool, and yours should be working for you to generate more. When you think about investing your money, whatever asset you’re considering should be a money making asset rather than a depreciating asset. For example: a new car is a depreciating asset, while a real estate investment that you turn into a rental property is a money generating asset.
There are a variety of assets to choose from when considering how to invest your resources. Before you start getting sophisticated with your investments, it’s best to have your basics covered. Make sure you have a handle on your 401k, if you work for a company that offers one, and consider opening a retirement account in the form of a Roth IRA or Traditional IRA. Within these accounts you can invest in equities, mutual funds, EFTs, and risk-free assets like Treasury bonds depending on your risk tolerance and age. Once you have these in place you can consider investments into real estate, launching your own business, and investing into others. If you own a business already, your shares in your company are financial assets that can be used to multiply your wealth over time. The bottom line? It’s important to invest in financial assets that are capable of appreciating over time.
The type of financial assets you choose to invest in depends on three factors: your risk appetite, your lifestyle choices, and your personal interests. Some people might be more suited to owning rental properties because they have the experience or network that make renovations and maintenance easy and cost-effective. Some may have a better skill set for launching a handful of e-commerce businesses, and others still might prefer becoming highly knowledgeable about the equity and crypto investment markets.
Obviously, owning cash-generating assets doesn’t mean that you’ll become a millionaire, but not owning this type of asset will make it significantly harder for you to get there — unless you come into some unexpected cash like an inheritance or winning the lottery.
How can you ensure your chances of financial success?
The best start to achieving your financial goals is to level up your financial literacy. Even as the world changes — whether that’s from fluctuations in the real estate market or the rise of cryptocurrencies — the fundamentals of finance remain the same: increase the value of your assets and cultivate multiple income streams while managing and minimizing liabilities.
At the most basic level, your net worth is your assets minus your liabilities, and therefore reducing your liabilities by $1 does the same for your net worth as increasing your assets by $1. Now obviously there is a limit to how much you can minimize your expenses – you still have to live, after all. But there’s virtually no limit to how many streams of income you can lay the groundwork for and grow over time. As you work to increase the value of your assets, you should also be working to cultivate multiple income streams.
From there, you’ll want to work on becoming cash-flow positive, aka making sure that your monthly income exceeds your monthly expenses. It sounds easier than it is, but — if you’re a ‘regular’ person in America in your 20s or 30s — chances are you’re in debt. In fact, the average net worth of Americans at age 28 is negative $10,000.
It’s critical to avoid falling deeper into debt just by living your life, but you can also use debt to your advantage. Using your credit cards to pay for your multiple streaming service subscriptions is not the same thing as taking out a business loan to invest in yourself and cultivate a new income stream. While many financial gurus will tell you that all debt is bad, taking on a business loan can often be a powerful tool for growth – as long as you’re financially literate and you understand rates and interest.
Invest in your future through wealth generating assets, cultivate multiple streams of income, and be intelligent about what debt you take on, and you’ll be on the right track to financial freedom and wealth accumulation. Remember, your money is a tool that should always be working for you. The more financially literate you are, the more sophisticated your tools will become and the more effective they will be.
Written by Charlotte DeMocker.
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