The Economic State of Millennials
It’s no secret that millennials are having a rough go of it financially. Between the 2008-2009 housing crisis and the 2020 COVID-19 pandemic, millennials have seen two major economic downturns since graduating high school or college, which has seriously dampened their upward mobility in the job market. They’re also struggling with student loan debt to a degree that no prior generation ever has, and that’s eating up a big chunk of their disposable income.
We’re also aware that this article is coming in the heart of the COVID-19 pandemic, which is upending the American economy in unprecedented ways. More than 40 million people have filed for unemployment, whole sectors and industries have ground to a halt, and we don’t know exactly what the future looks like.
That’s okay. These tips aren’t time-sensitive. You don’t have to take everything we say to heart right now — you can wait a year or two. The point we’re trying to make is that a million dollars in net worth is attainable if you make the right moves.
There are a lot of pundits out there who claim that millennials aren’t as wealthy as their parents because they spend too much on coffee, groceries, avocado toast, ride-sharing apps, or any number of other little things. These claims are, quite frankly, ridiculous.
The biggest thing holding millennials back is the fact that they aren’t investing. More than two-thirds of millennials have invested less than $10,000 in their lifetimes, and it’s not just because they don’t have the money. Three-quarters of millennials say that saving money is a priority, and more than half of them have savings over $15,000. But they’re not putting that money into long-term investments.
It’s possible that people who have already lived through two major stock market collapses are nervous about putting their money in stocks. We wouldn’t blame you if that’s the case. But you have to remember the time scale involved — you’ll be building investments for 30 to 50 more years, and there’s never been a downturn that lasted more than a decade.
Another impression seems to be that investing in the stock market involves too much work, intricate financial knowledge, and time to do correctly — but that’s not true, either. As we’ve spelled out before, index funds are a great way to earn almost 10 percent returns with virtually no effort. Compare that to near-zero interest rates in savings accounts and investing is a no-brainer.
Yes, we were just saying some unfavorable things about savings accounts, but saving doesn’t have to mean opening an account at your local bank branch. Putting money in a brokerage account still counts as savings — the main takeaway is that if you want to hit a net worth of a million dollars, you need to be saving. That might mean making some sacrifices. It means you won’t be buying a new car every three years. It means you might not live in that downtown penthouse apartment. It means you should pay attention to your budget. But through the power of compound interest, it also means that everything you can set aside will help your nest egg grow.
One thing that people often forget about is retirement accounts. These accounts are usually in the form of low-risk index funds and bonds, so the returns are decent. But more importantly, many employers will match your contributions. If your employer matches your retirement account at all, take full advantage of everything they offer you.
For example, let’s say your employer matches every cent of your contribution up to three percent, then half of your contribution up to five percent. That means if you contribute five percent of your salary, they’re matching four percent themselves, nearly doubling your contribution. It’s free money!
Play with your salary and contribution numbers in this calculator. If you make a good salary and save aggressively, a million-dollar balance is well within reach.
Buy a House
This is controversial advice, and there are a lot of different factors to consider when deciding whether to rent or buy. The New York Times has put together this very comprehensive, interactive graphic to help you decide which is more lucrative to you, but there are a few reasons we think purchasing a home is a fast track to higher net worth:
- Locking in housing costs. If you rent, your rent will probably go up every year or two. If your $3000 per month rent goes up five percent a year, you’ll be paying nearly $8000 a month in 20 years. If you sign a mortgage, your monthly payment won’t change much for the entire term of the mortgage. It might be more expensive to buy a house month-to-month in the short term, but it will pay off over time.
- Leveraging your investment. If you have $100,000, you can buy $100,000 in stocks or you can put a down payment on a $500,000 home. If both assets appreciate at the same rate over time, you’re making a lot more on the house than you are on your stocks. Yes, you have to pay the mortgage payment, but you’ll have to pay for lodging no matter what. This way, your monthly payment is adding to your net worth.
- Sweat equity. If you buy $100,000 in stocks, index funds, CDs, gold, or almost any other asset, there’s almost nothing you can do to make those assets more valuable. With a house, that’s not the case. By investing your own time and effort, you can make major upgrades to your home and add enormous resale value without spending a huge amount on upgrades.
Talk to a Financial Advisor at First Western
It’s easy for us to give general pointers like this, but every person’s situation is different, and there’s no one piece of advice that will work the same for everyone. Your salary, benefits, housing situation, and any assets you already have will all play a role in your plan for the future.
At First Western Trust Bank, we pride ourselves on creating tailored, specific financial solutions for each and every one of our clients. We’ll examine every aspect of your financial situation in addition to your goals, values, and priorities to help you put together a plan that’s right for you. Ready to get started? Get in touch today.
Investment and insurance products and services are not a deposit, are not FDIC insured, are not insured by any federal government agency, are not guaranteed by the bank and may go down in value. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice.