Unlocking Financial Success: 5 Steps for Young Americans to Build Wealth

The Financial Landscape for Young Americans

Many young Americans today feel the American Dream is out of reach. Rising costs of education, housing, and daily living expenses have created significant financial hurdles. However, by understanding the current economic realities and implementing smart strategies, it's still possible to build wealth and achieve financial success.

The Rising Cost of Education

One of the most significant challenges facing young Americans is the skyrocketing cost of higher education. Since 1980, the average cost of a college education in the US has increased by an astounding 1,200%. To put this in perspective:

• In 1980, a 4-year degree cost approximately $12,000 when adjusted for inflation
• Today, a 4-year degree at a public university costs an average of $39,000

This dramatic increase has forced many students to take on substantial debt to finance their education. The median student loan debt for college graduates in 2023 ranged between $20,000 and $25,000. This debt burden can have far-reaching effects on other aspects of financial life, including:

• Paying for daily necessities
• Saving and investing for retirement
• Affording rent
• Buying a house

The Housing Affordability Crisis

Another major obstacle for young Americans is the historically high cost of housing. In the past, the traditional path to building wealth often included buying a home. However, this has become increasingly difficult for the current generation. Consider these statistics:

• 40 years ago, a house typically cost about 3.5 times the average household income
• Today, the median house price is nearly 6 times the average household income

To illustrate this shift:

• In 1984, a couple with a median household income of $22,000 could buy a house for about $80,000
• In 2023, the median household income was $80,000, but the median house price was $426,000

This means houses have almost doubled in price relative to income over the past 40 years. The result is that housing has become historically unaffordable, especially for first-time homebuyers.

The Rent Trap

With homeownership out of reach for many, more young Americans are turning to renting. However, this has created its own set of challenges:

• Increased demand for rentals has led to higher rent prices
• Rent is growing faster than income, creating a widening affordability gap

The Root of the Housing Crisis

While many factors contribute to the housing crisis, one significant issue is the systematic underbuilding of housing in America over the past 50 years. This is largely due to:

• Zoning laws that restrict the types of housing that can be built in many areas
• Local government policies that often prioritize single-family homes over more diverse and affordable housing options

The result is a limited housing supply, which drives up prices and makes it difficult for young people, middle-class families, and people of color to find affordable housing.

5 Steps to Build Wealth as a Young American

Despite these challenges, it's still possible for young Americans to build wealth and achieve financial success. Here are five key steps to take control of your financial future:

Step 1: Understand You're in Control

The first step in building wealth is recognizing that you have more control over your financial future than you might think. While certain economic factors are beyond your control, your personal financial decisions can have a significant impact on your long-term wealth.

Key points:

• Acknowledge the challenges, but don't let them paralyze you
• Focus on what you can control
• Avoid falling into a negative mindset about your financial prospects

Step 2: Define Your Financial Priorities

To build wealth effectively, you need to have a clear understanding of what's important to you financially. This involves developing your own vision of a "rich life" that aligns with your values and goals.

Consider:

• Do you really want to own a home, or is renting a better option for your lifestyle?
• Where do you want to live long-term?
• What are your career goals?
• Do you want to start a family?
• What luxuries or experiences are most important to you?

Once you've identified your priorities, you can allocate your resources accordingly. A general guideline for budgeting includes:

• Fixed costs (rent, groceries, debt payments): 50-60% of take-home pay
• Investments (particularly retirement): At least 10% of take-home pay
• Savings (emergency fund, future goals): 5-10% of take-home pay
• Guilt-free spending (entertainment, travel): 20-35% of take-home pay

Step 3: Automate Your Finances

One of the most effective ways to build wealth is to automate your financial system. This reduces the mental effort required to manage your money and ensures that you're consistently saving and investing.

Here's how to set up an automated financial system:

1. List all your financial accounts, including login information
2. Link your accounts together for easy transfers
3. Set up automatic transfers based on your pay schedule

For example, if you're paid on the 1st of each month:

• 1st: Paycheck deposited, portion sent to 401(k)
• 5th: Transfer money to savings and investment accounts
• 7th: Autopay bills and credit card balance

By automating your finances, you'll spend less time managing money and more time focusing on other aspects of your life.

Step 4: Build Your Financial Moat

A crucial step in building wealth is creating a financial buffer to protect you from unexpected expenses or income loss. This typically takes the form of an emergency fund.

Key points:

• Aim for 3-6 months of fixed expenses saved
• Keep this money in a separate, easily accessible savings account
• Build this fund gradually through consistent, automated contributions

Step 5: Start Investing Now

Investing is where true wealth is created. The earlier you start, the more time your money has to grow through compound interest.

Key investing tips:

• Aim to invest at least 10% of your take-home pay
• If you can't start at 10%, begin with what you can and increase gradually
• Increase your investment contributions by 1% each year
• Take advantage of tax-advantaged accounts like 401(k)s and IRAs
• Consider low-cost index funds for a diversified, hands-off approach

Rethinking Traditional Financial Milestones

As you work towards building wealth, it's important to critically examine traditional financial milestones and determine if they align with your personal goals and current economic realities.

The College Conundrum

While the cost of college has increased dramatically, it's important to consider the potential return on investment:

• College degree holders earn an average of $1 million more over their lifetime compared to those without a degree
• Only about 25% of students pay full tuition at public universities
• Many schools offer scholarships, grants, and financial aid

When considering higher education:

• Research potential earnings for different majors
• Explore all financial aid options
• Consider starting at a community college to reduce costs

Renting vs. Buying

Contrary to popular belief, renting is not always a "waste of money." In fact:

• In 100% of the top US metro areas, it's currently cheaper to rent than to own
• Renting and investing the difference can potentially lead to greater wealth accumulation

When deciding whether to rent or buy:

• Consider your long-term plans and lifestyle preferences
• Calculate the true costs of homeownership, including maintenance and property taxes
• Compare the potential financial outcomes of renting and investing vs. buying

Protecting Your Personal Information

As you work on building wealth, it's also important to protect your personal information from data brokers who may be selling your details online. Consider using a service like DeleteMe to remove your personal information from search results and data broker websites.

Conclusion

Building wealth as a young American in today's economic climate is challenging, but far from impossible. By understanding the current financial landscape, setting clear priorities, automating your finances, building a financial buffer, and investing consistently, you can take control of your financial future and work towards your own version of the American Dream.

Remember, the most important step is to start now. Even small actions, when taken consistently over time, can lead to significant wealth accumulation. Stay informed, be proactive, and don't be afraid to challenge traditional financial wisdom if it doesn't align with your goals and circumstances.

By following these steps and maintaining a long-term perspective, you can navigate the financial challenges facing young Americans and build a secure and prosperous future for yourself.

Article created from: https://www.youtube.com/watch?v=dGugFvi4X48