A Millennial's Guide to Building Wealth

Building wealth is an elusive dream for many millennials. The challenges can feel overwhelming when dealing with student loan debts, rising housing prices, and the ever-changing financial landscape. However, achieving financial success is possible with the right strategies and mindset.

Here's a guide to help millennials navigate the world of personal finance.

Create an emergency fund

Life can throw financial curveballs, whether a sudden job loss, medical expense, or an unexpected car repair.

Without an emergency fund, you may need to resort to credit cards or loans during sudden financial crises, leading to accumulating interest and potential long-term debt.

Knowing you have a financial buffer can reduce stress and provide mental peace.

An emergency fund allows you to make decisions based on choice rather than necessity, like changing employment.

According to Vanguard, most experts believe you should have at least 3-6 month’s living expenses in your emergency fund.

Buy insurance

Insurance can provide millennials and their loved ones with a safety net and financial security in emergencies, accidents, disability, and premature death.

Here are some insurance tips for millennials:

Buy renters insurance: Renters insurance protects your personal belongings and provides liability coverage in case someone gets injured in your home. It's affordable and can save you thousands in the event of theft or damage.

Get health insurance: Whether through your employer, your parents, or the healthcare marketplace, having health insurance protects you financially if you are seriously sick or injured. At a minimum, get a high deductible plan.

Consider insuring your smart devices: Phones, laptops, tablets, and other gadgets are expensive to replace if broken or stolen. Mobile phone insurance plans can cover damage or theft.

Buy auto insurance: Make sure you have adequate liability, collision, and comprehensive coverage. Raising deductibles can lower premiums. Consider usage-based plans if you don’t drive much.

Get life insurance: If you have a spouse, children, or others who depend on your income, life insurance provides for them if you die. Term life insurance is affordable.

Bundle policies: You can often save by bundling renters, auto, and other insurance with one company. Compare quotes for best rates.

Your most valuable asset

As a millennial, you have a precious asset:  Time.

The evidence is compelling that attempts to time the market (buying when the market is low and selling when it is high) is a poor investment strategy.  According to Schwab,  timing the market perfectly is “nearly impossible.”  A better approach to investing is making a plan and sticking to it.

“Time in the market” is important because of the benefit of compounding.

If you invested $1000 that earned 5% annual interest and never added anything to your savings, it would be worth more than four times that amount ($4,321) after thirty years.

Because you’re young, you can allocate most of your investments to stocks, which have historically earned higher returns than bonds over time.

Getting on the investing bandwagon at a young age may require overcoming your bias against investing in stocks.  According to a Bankrate survey, many millennials incorrectly believe high-yield savings accounts are a better long-term source of growth than stocks.

How much should you save?

A common concern of millennials is: “How much should I save?”

A widely recognized budgeting guideline suggests the 50/30/20 rule:

• 50% of your income goes to necessities such as housing, utilities, and groceries.

• 30% is allocated to wants, like dining out, entertainment, and other non-essentials.

• 20% should be saved or used to pay off debt.

For millennials aiming for a comfortable retirement, the recommended savings rate is often cited as 20% of your gross income, although some experts suggest increasing that to 22%.

The good news is that millennials are more financially responsible than older generations, according to a survey by Bankrate.

They start saving earlier, save more, and are less likely to borrow from their retirement savings. They are more confident in dealing with complex financial matters and are more diligent with their money.  They also budget better and are more frugal.

They’re off to a good start.

Whatever amount you can save, what’s important is starting early, saving consistently, and adjusting your savings as your income increases.

Finally, because high fees can erode the benefits of compound interest, you should always be mindful of any charges associated with your investments.

The role of a financial advisor

Here’s how a financial advisor can help millennials:

Goal setting: A financial advisor can offer customized advice, ensuring financial strategies align with individual goals and circumstances.

Home buying: Offering insights into saving for a down payment, understanding mortgages, and when to buy.

Retirement planning: Even if Social Security remains viable, millennials need an aggressive plan to save sufficient funds to retire comfortably.

Investments:  Advisors help millennials understand stock markets, bonds, mutual funds, asset allocation, and the benefits of diversification.  They can also assist with dividing your savings between retirement and non-retirement accounts and issues like whether a traditional or Roth IRA is optimal for your needs.

Estate Planning and insurance: Often overlooked by younger generations, estate planning and insurance are a crucial part of financial planning for millennials.

Education:  One of the most valuable assets a financial advisor brings is education and financial literacy, especially in budgeting, saving, and understanding investment options.

Adaptability: As the financial landscape shifts, an advisor ensures that investment and saving strategies align with their client's goals.

Final thoughts

Building wealth as a millennial may present unique challenges, but it offers unparalleled opportunities. With an understanding of the financial landscape and the power of time, millennials can achieve long-term financial success.

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