The COVID-19 pandemic brought significant financial challenges to people worldwide. Still, for some Americans, it also provided an unexpected financial boost, largely driven by relief packages and record-low interest rates. Among those who have seen substantial financial growth during this period are millennials, born between 1981 and 1996, who have more than doubled their total net worth, reaching an impressive $9.38 trillion in the first quarter of 2022, up from $4.55 trillion just two years prior, as reported by MagnifyMoney.
This remarkable growth isn’t just about total net worth; millennials’ average net worth, defined as total assets minus total liabilities, also saw a twofold increase during the same period, jumping from $62,758 to $127,793, according to the report.
Millennials’ Wealth in Perspective
While millennials have made substantial financial progress, the report highlights that they still trail behind older generations in terms of average net worth. Gen Xers and baby boomers, for instance, boast an average net worth of $647,619 and $1,021,264, respectively. This discrepancy underscores the generational wealth gap that continues to exist.
Real Estate Dominates Millennials’ Wealth
The rise in home values over the past couple of years significantly contributes to millennials’ wealth growth. Real estate, including primary homes and other properties, accounts for more than one-third of millennials’ total assets. Notably, the median U.S. home sales price increased from $329,000 in the first quarter of 2020 to nearly $429,000 two years later, as per Federal Reserve data.
However, it’s essential to recognize that many millennials who recently purchased homes may also carry substantial debt. The report found that nearly 63% of millennial debt is attributed to home mortgages, followed by almost 36% in consumer credit.
The Importance of Cash Flow and Retirement Planning
Certified financial planner DJ Hunt, who serves as a senior financial advisor with Moisand Fitzgerald Tamayo, suggests that millennials should prioritize cash flow over net worth, particularly during this stage of their careers. He emphasizes that if monthly mortgage payments hinder millennials from fully funding their retirement accounts, they may risk losing financial ground in the long run.
Hunt advises that millennials in their early 40s should aim to maximize 401(k) contributions, capped at $20,500 in 2022. Younger workers, on the other hand, should contribute enough to receive their company match, striving for up to 15% of their gross income. The specific definition of a fully funded retirement account varies from person to person, Hunt notes.
Diversification: A Strategy for Building Wealth
While home equity is undoubtedly valuable, diversification is crucial, especially for younger investors with ample time to build assets, according to Eric Roberge, a CFP and CEO of Beyond Your Hammock in Boston. Roberge suggests allocating 20% to 25% of gross income annually to long-term investments, whether in retirement plans or a brokerage account.
Roberge emphasizes that a diversified portfolio often yields higher returns in the long term. Thus, it’s wise to consider long-term investment options alongside home ownership.
Leveraging Home Equity with HELOCs
For millennials who have accumulated substantial home equity, exploring a Home Equity Line of Credit (HELOC) can be a strategic financial move. HELOCs allow homeowners to borrow from a pool of money over time, offering flexibility and lower interest rates compared to credit cards.
Ted Haley, a CFP and President/CEO of Advanced Wealth Management in Portland, Oregon, suggests that having a HELOC in place, even if not immediately used, can provide financial security. HELOCs are typically inexpensive to set up, and there are no added costs until they are utilized. Despite potential interest rate fluctuations, having a HELOC remains a valuable financial tool for homeowners with substantial home equity.
In conclusion, millennials have made significant strides in building wealth during the pandemic, driven by factors like real estate appreciation and economic relief measures. However, experts emphasize the importance of not solely relying on net worth figures and instead focusing on cash flow management, diversification, and long-term financial planning to secure a stable and prosperous financial future. Leveraging tools like HELOCs can further enhance financial flexibility and security for those who have accumulated home equity.
