A study by the American Institute of Certified Public Accountants (AICPA) reveals that 25% of millennials fall behind on payments, and almost 50% of them still receive financial assistance in some form from their parents.
The study’s most baffling revelation though, is that 70% of millennials think of financial stability as being able to pay off their bills each month. These stats call for the re-evaluation of financial literacy of a generation otherwise considered savvy.
Let’s set financial goals aside for a moment, millennials will need to beat inflation and save enough money even to maintain their current standard of living. Wealth building is not an option, it’s a necessity.
4 Wealth building habits to secure a financial future
Granted, there is no single formula for building wealth, but it doesn’t have to be rocket science either. That being said, it does take effort, patience, and persistence.
While a financial advisor may put a double-digit return on investor portfolios, they simply can’t monitor each client’s financial habits individually. Take charge of your future and secure it financially by following these 4 wealth-building habits.
Double-down on debt and invest intelligently
Debt has destroyed the budgets of entire nations, why should an individual’s budget be immune to its wrath? Millennials are $1 trillion in debt—the highest of any generation in history, says the Federal Reserve Bank. That’s not to say that debt isn’t a great tool when used prudently.
For instance, using debt to finance a car one requires to commute to work can help a person stay employed. On the contrary, using debt to finance a Mercedes when a person only has money for a Hyundai is foolish. Instead of taking on more debt, consider either investing or paying down the current debts.
For those who are already overleveraged, it’s best to use a top-down approach and put as much money as possible towards discharging current debts. Start by paying off high APR debts like credit card debt first. This helps minimize the total interest expense, and the surplus can be used to pay off other debts.
Note that it makes little sense to invest money and earn a 7% return for someone who is paying interest on debt at the rate of 11%. Paying off the debt leaves more money on the table in such cases.
These numbers aren’t comparable either. There’s a tax effect to factor in. Assuming the person falls in a 15% tax bracket, their after-tax return on investment reduces to 5.95%. This widens the difference further.
Consider investing only when:
- all debts have been paid off, or
- the after-tax return on investment is greater than the after-tax cost of debt.
Investments can fast-track the process of wealth-building. Nobody ever got rich by just hoarding cash in a savings account. Everybody would love to be the next Warren Buffet or Peter Lynch—but the fact is, a lot of people lack the combination of shrewdness and discipline required for successful investing.
Lately, crypto has been all the rage. This high-risk asset class is turning heads all over the place. Smart investors are making money like there’s no tomorrow. Back in 2009, investors had to know what mining is to buy Bitcoin. Now, people can buy Ethereum with a credit card, and it will become easier still.
If crypto is too risky an asset, there are equities, REITs, commodities, and endless asset classes to invest in. Some people make money from all these asset classes because they know them inside out. For those who aren’t confident about investing directly, there are mutual funds.
There are always options—one just has to look!
Make more money and avoid “lifestyle creep”
“You have to have money to make money,” goes the saying. Is it entirely true, though? Having money certainly makes it easier to earn money. That doesn’t mean there’s no way to boost income for those who don’t already have enough money.
Since everybody is in a different profession, there’s no one method of increasing income that works for everybody. However, the following should work in most cases:
Disciplined approach and hard work
People recognize and respect hard work. Most employers will reward hard work. Over the long term, this can translate to promotions and increased pay.
Education is another tool that can greatly influence a person’s money-making capabilities. It comes at a cost, but the return on investment is significantly higher than other investments. Plus, some employers are even happy to sponsor an employee’s education if they believe it will benefit the organization.
Even those with great qualifications and experience can benefit from marketing. From a focused résumé to a top-notch LinkedIn profile, each individual can stand out from the crowd with a personal brand. Make it relatable and authentic for potential employers or customers; both salaried and self-employed can use marketing in their favor and increase their income.
Making more money is half the battle won. More surplus income brings the desire to upgrade lifestyle to match with those that earn a similar income.
Frugality is the most common trait among the richest in the world. Even Kawhi Leonard, the NBA superstar, uses coupons while grocery shopping. It’s unbelievably easy to fall into the lifestyle creep trap.
It’s natural too. Now, there’s surplus cash that hits the bank account each month. Everybody is fighting to get a bite out of this raise from the fancy condominium ad to that sales rep at the local car dealership. It’s tempting to give in to these “materialistic pleasures.”
So, be mindful. It’s difficult, but smart. Billionaires are doing it too, so don’t shy away from continuing the same lifestyle even after a raise. The long-term rewards are so worth it!
Draw monthly budgets and ignore the 50/30/20 rule
Not keeping a track of incomes and expenses is like driving with a blindfold on and hoping not to crash into something. The car will at some point!
Prepare budgets and get comfortable with spreadsheets. Track money coming in and going out. Often, it’s too late when people realize they have been spending more than they earn. It’s easy to overestimate how much you can afford to spend.
Budgetary control isn’t helpful just for big corporations, they’re just as helpful a tool for taking control of personal finances.
If your budget shows a total of $2000 a year spent at Starbucks, it’s time to get that coffee machine fixed. Restaurant receipts tallying at about $3,000 a year? Consider enjoying those wholesome home-cooked meals once in a while.
Fixed expenses such as insurance, rent, and mortgage payments are here to stay. So, cut down on luxuries such as expensive spa treatments and eat at McDonald’s instead of a lavish restaurant. See what adjusting the discretionary expenses in the budget spreadsheet does to the savings.
This exercise will likely fix most financial despondencies and leave individuals with more in savings each month. So, what happens to these savings?
Well, traditional wisdom dictates following the 50/30/20 rule. The rule recommends spending 50% of the income on necessities such as food, rent, utilities, etc., and 30% on discretionary expenses like eating out or movie tickets. The remainder 20%, as per the rule, should be invested.
This rule may throw a budget out of whack. Here’s a rule that would make more sense: spend what your necessities cost you regardless of the percentage, aggressively minimize discretionary expenses and aim for far less than 30%, and invest the rest in diverse asset classes.
If this sounds crazy, put these numbers in a budget spreadsheet and compute the savings. Next, look at the potential investible amount available each month and simulate the returns for these investments over the next 10 years.
It won’t sound crazy when the spreadsheet spits out that colossal net worth for the 10th year.
Insure against contingencies (including divorce)
Insurance doesn’t yield any returns. It’s an expense that takes an amount out of the bank year after year. It might pinch to see that amount being taken away and getting nothing in return. Well, not nothing, the insurance does provide protection—but it’s not tangible until there’s an emergency.
That being said, insurance is essential for protecting wealth against adversities. A person could’ve managed to do well; one large expense, and it’s gone. Insurance is also important for financially protecting the family too. In the absence of the breadwinner, the family must have enough money to live on.
Medical contingencies aren’t the only ones that can significantly impact wealth, there’s divorce too. A study reveals that a divorce can destroy up to 75% of a person’s net worth. Losing 75% of net worth comes with significant lifestyle changes.
Marrying the right person and staying married is easier said than done, but consider what’s at stake here. With almost 50% of marriages ending in divorce, it is one of the major obstacles in a person’s wealth-building pursuit.
Wealth building is a marathon, not a sprint. It takes at least 5-10 years to build tangible wealth. During this time, several other variables like discipline, patience, consistency, and willpower play a key role. Almost everyone can build wealth, provided they follow these golden rules diligently.