High Income? Convert it Into a Portfolio With Long Lasting Wealth Potential
They’re becoming more reliable attention-getting headlines – “Millennials are struggling to get ahead”, “Millennials can’t seem to create wealth”, “Millennials, despite six figure salaries, workplace benefit programs and even dual incomes aren’t making progress”. The focus is usually on the spending and lifestyle habits of a new generation that is coming into its own, but the data tells a much different story.
In 2016, wealth of a middle-class family that was headed by someone born in the 1980s was 34 percent below the level experienced by earlier generations at the same age. Over the last three years, changes in economic and social conditions have narrowed that gap to 11%. 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 potentially help this generation leap ahead.
Tracking Your Spending Habits
Making and keeping a budget is one of the very first principles in creating wealth. If you don’t have anything left after expenses, you won’t have anything to invest with and potentially grow. Although people tend to think budgeting is hard, it doesn’t have to be, 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 apps and software have 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 your budget back 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 far the biggest monthly expense is housing. Whether you own or rent, the typical amount someone spends on a monthly basis can be upwards of 20 or 30% of their earned income. In the past, this was constraining where people were living in expensive communities just so they could be close to their workplace. These people likely lived in big cities, but all of that has changed. The pandemic has normalized working-from-home to the point where it’s likely to remain long after the COVID has receded, and like other benefits, it may become something companies offer to attract strong employees.
Picking up and leaving the city no longer requires multiple expensive trips to check out new communities and houses. Now it can mostly all be done on online. Moving can lower costs in three ways. It can result in lower state and local taxes; less-expensive housing stock which could 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 (for now).
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 potential source of income.
Investing Is Getting Personal
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 are and where they want to go – not just to the bottom line of their assets.
Conclusion
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. Changes in spending habits, rethinking where they’re living and working and thoughtfully putting their money in more alienable investments are all things they’re doing to move the needle for the next generation.
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