7 Ways Millennials Can Build Wealth in 5 Years
Written by
Jennifer Taylor
Edited by
Gary Dudak
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Wealth generation doesn’t happen on its own. If you’re ready to create a future filled with financial security, now is the time to start — especially for millennials.
As someone in your late 20s to early 40s, the financial moves you make today will impact your tomorrow. Let’s say you’re focused on building wealth over the next five years. This might not seem like a long time, but if play your cards right, it’s long enough to make a difference.
You’ll need to commit to making a combination of big moves and smaller ones that add up over time. Time is money, so try to get started as soon as possible. Here are seven tips to help boost your net worth in the next five years.
Set Future Goals
“[An] investment into use asset in real estate, like homes, can be eventually rewarding but also very expensive to maintain, and the most expensive at first,” said Peter Hoglund, AIF, CFP, senior vice president at Wealth Enhancement Group.
Therefore, he advised against rushing into this type of investment. “If you consider a home a wealth generator, renting now may allow you to save more and wait for a better opportunity,” he said.
He said to figure out where you would like to be and how additional wealth would impact your lifestyle. “But also know that opportunities can trade off growth for the ability to access wealth easily. If you need the funds within five years, you may need to accept a lower investment return to access quickly,” he said.
Pay Extra on Your Mortgage
If you can swing it, Hoglund recommended adding a small amount of additional principal to your monthly mortgage payment.
“Any dollars above the minimum on a fixed-rate mortgage automatically go towards the principal,” he said. “This adds up by shaving years off the back end of a long mortgage, but it can also build equity now that gives you flexibility if you need to move early.”
Carefully Examine Your Budget
“Identify your family expenses and where they are going,” Hoglund said. “Life can creep up on us, and so can the cost of living our lives.”
He advised looking back to where your budget was two years ago, to see if it went up as your income increased, and if any of your expenses can be pared down.
“Look at any upcoming expenses that are likely — new car, kids’ braces, big vacation — and turn some of those living expenses into ear-marked savings for good things to come,” he said.
Identify Risks
“If you had income or bonus adjustments over the last few years, check if you are now ‘under-covered’ in life or disability insurance,” Hoglund said. “You have more income to have a more significant lifestyle, but if you don’t increase your protection, then your risk has increased.”
You’ve worked hard for the lifestyle you’ve created, so you need to protect your assets. “Investment gain can also bring unexpected investment risk,” he said. “Rebalance and review to confirm you haven’t exceeded your comfort level.”
Maximize Retirement Savings
“Permanently save the maximum your cash flow allows into an employee retirement plan like a 401(k),” Hoglund said. “But consider whether some of that savings should be contributed as Roth 401(k) — if allowed.”
If you can do this, he said you’ll be giving your future self a major advantage. “You will get a jumpstart on retirement flexibility that many older Americans are struggling with now,” he said. Since a Roth 401(k) allows you to contribute after-tax dollars, you don’t have to pay income tax on funds withdrawn in retirement.
Invest in a Traditional IRA
While a Roth 401(k) can be a great option, Hector Castaneda, CPA, principal at Castaneda CPA & Associates, said a traditional IRA can be a better choice for some people.
“If you’re in a high tax bracket, it may make more sense to go with a traditional [401(k)] and pay for the taxes in retirement, when presumably your tax bracket will be lower than it is now,” he said.
Turn a Hobby Into a Side Gig
Supplementing your income can give you more money to work with, thus building wealth.
“Starting a hobby job that may later turn into a full-time gig may be a great way to offset regular active income from your W-2 job,” Castaneda said. “This is especially helpful if you want to dabble in a side project, but are not quite ready to make it your primary source of funds.”
Your side hustle needs to be active, not passive, he said. For example, he said having a short-term rental would be an active gig, but a long-term rental would be considered passive, as they don’t always offset your regular W-2 income.
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