• Brian Bass

Converting High Income into Lasting Wealth

It’s become something of a reliable attention-getting headline that Millennials struggle to get ahead and create wealth, despite six-figure salaries, and even when there are dual incomes. The focus is usually on the spending and lifestyle habits of a new generation coming into its own. The data tells a much different story.

Wealth in 2016 of the median family headed by someone born in the 1980s was 34 percent below the level experienced by earlier generations at the same age (1). Over the last three years, positive conditions have narrowed that gap to 11% (2), 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 work/life trends that can help, and the prospect of a strong economy as well as an evolving investment management landscape may help this generation leap ahead.

Budgeting doesn’t have to be a massive chore, and it definitely doesn’t have to make you feel like you can't live the type of life you want

A New Way to Look at Tracking Spending

Making and keeping a budget is at the core of creating wealth. If you don’t have money left after accounting for your main expenses, you have no capacity to invest and grow your wealth. That’s not new. The new part is that budgeting doesn’t have to be a massive chore, and it definitely doesn’t have to make you feel like you can't live the type of life you want.

Technology has not only simplified budgeting, but it has also helped to incorporate some of the principles of behavioral finance (the why behind what you do with money). Budgeting software has 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 budget 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, programs like Quicken can change your view of how you spend. Being able to see your spending and track it over time allows you understand your habits and identify areas of concern. 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, the biggest monthly expense is housing. This was also traditionally the most constrained where people were forced into expensive communities to be close to their jobs. Things are different now. The pandemic has normalized working-from-home to the point where it’s likely to remain long after COVID has receded, and like other benefits, it may become something companies offer to attract strong candidates.

Relocating no longer requires multiple expensive trips to check out new communities and houses. Now it can all be done online and help save you money in other areas of the budget. One huge benefit to the work-from-anywhere movement is that you it can choose to live in a state that has lower state and local taxes. The pandemic set off a massive exodus from unfriendly tax states like California and New York in favor of zero income tax states like Florida and Tennessee. These states also typically have lower housing costs which can reduce the monthly rent, utilities, and maintenance line items.

If you decide you don’t want to own, the housing market has more to offer now. 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 on the capital gains that have likely accrued since you purchased.

You may also choose to hold onto your existing home and rent it out, essentially converting it into an investment property. This additional cash flow can help to offset expenses elsewhere in the budget and allow you to hold onto the tax benefits that come with owning a home. This can be a way to build a real estate portfolio that provides you with a source of income that is separate from your primary role in the workforce.

Investing Is Now Investor-Centric

Today’s investors have a landscape that is different in many ways. There are more investment products available, including alternatives that were previously only available to institutions and ultra-high net worth investors. In addition, there are many specialized investment vehicles out there you can use to express your values and/or beliefs in your portfolio.

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 need and where they want to go, not just to the bottom line of their assets. After all, the investment portfolio is the engine that drives the financial plan. If your advisor doesn't know where you're going and how you want to get there, he or she is just selling you product.

The Bottom Line

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.

1. A Lost Generation? Long-Lasting Wealth Impacts of the Great Recession on Young Families. 2018 Study. The Federal Reserve Bank of St. Louis. 2. Hernandez-Kent, Ana and Ricketts, Lowell R. Millennials Are Catching Up in Terms of Generational Wealth. The Federal Reserve Bank of St. Louis. March 30, 2021.