It isn’t hard to find headlines lamenting the many financial missteps of millennials. Need I list examples beyond our infamous love of $5 lattes and overpriced avocado toast?
As millennials, we’re often labeled as poor financial decision-makers. But we can’t all be painted with the same brush.
Financial literacy is a spectrum. Some millennials have a clear action plan for how to prepare for retirement, while others haven’t given it much thought.
If you fall in the former camp, congratulations. If you’re part of the latter, have no fear. Time, your greatest asset, is still on your side.
If you’re looking for a place to start, you’ve come to the right place. A lot of traditional financial advice doesn’t strictly apply to our generation, so we need to prepare differently from our predecessors for our retirements, or what I call financial independence.
What Everyone Gets Wrong About Millennials and Money
At first blush, millennials seem to struggle with establishing good financial habits: things as simple as living within our means, saving money or setting aside enough to fund our retirement fully.
While some of us have trouble delaying gratification, we’re actually better at it than our predecessors.
Consider the marshmallow test: This famous experiment studied when the control of delayed gratification develops in children (if ever). The test showed a strong connection between those who could delay gratification and better associated life outcomes.
In other words, if you can wait to be satisfied, you end up better off in terms of educational attainment, body mass index, career earnings and many other quality-of-life measures.
According to recent iterations of the marshmallow test, we can hold our wants in check just fine, thank you very much.
Knowing this, it’s now our responsibility to change the perception of us and shift course, especially considering our retirement preparation won’t be the same as it is for people leaving the workforce now.
Many espouse the idea of setting aside 10% of your paycheck and riding out Social Security and Medicare to cover the rest of your expenses in retirement. We don’t have a clear line of sight on the future state of those entitlement programs so many hold dear in their golden years.
Instead, we need to move toward financial independence and take our financial futures into our own hands.
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3 Strategies for Millennials to Build Wealth for Retirement
Our biggest asset is time. Said plainly, we’re expected to live longer than past generations, and we’re still young. Because financial decisions tend to compound with time, we need to start making financial changes sooner rather than later.
I suggest doing it in the following ways:
1. Save More by Living Within Your Means
No amount of earning, saving and investing will be enough if you can’t control your spending. Any budget can be overrun with expenses. So this step comes first because it has the most impact in the long term.
Financial independence requires a strong grip on spending impulses. By controlling your own actions, there are far fewer risks of failure. You’ll spend intentionally and on items that matter.
Slashing enough from your budget can help you reach the savings rate necessary to accelerate your journey to financial independence. Knowing yourself is paramount to understanding what you can and can’t cut from your budget.
2. Build Long-Term Wealth Through Index Investing
The next component involves learning to invest in diversified low-cost index funds. These funds provide long-term capital appreciation for the added money you’ll have by finding savings in your budget.
Holding these investments for long periods of time allows you to compound your returns and worry about other areas of your life. Counter to what you see on Wall Street, when your money is invested well, doing less is more.
My wife and I hold the majority of our wealth in low-cost index funds and will do so for years to come. But we maintain a diversified portfolio of investments and hold assets for various purposes. For example, we have most of our money for a home down payment in short-term Treasurys and high-interest savings accounts.
3. Find Passive Income to Cover Your Cost of Living
A key priority is finding passive income streams that can eventually cover your cost of living and leave room for growth.
Many options exist, including investing in dividend stocks, limited partnerships and real estate. Some passive income opportunities come with tax advantages to help you shortchange Uncle Sam.
Of particular interest to me is the last item: real estate. By purchasing property and becoming a landlord, you can experience long-term capital appreciation and steady rental income, while also enjoying generous tax advantages.
As a CPA, I have an appreciation for how the tax code can provide incentives for certain actions. Landlords can claim numerous tax deductions associated with owning and maintaining their property, thereby lowering their taxable income.
How Millennials Can Leverage Time and Ingenuity
My wife and I have used creative ways to build our wealth. However, these three tenets guide our financial decisions because we know they’ll provide the surest path to a safe retirement. In the coming decade, we hope to reach financial independence.
If this resonates with you and these steps seem actionable for your situation, you’ll go a long way toward reaching a secure financial future. By cutting expenses and learning to control your budget, investing in low-cost index funds and building passive income streams to cover your cost of living, you can move closer to financial independence.
Riley Adams is a CPA who is originally from New Orleans. He works as a senior financial analyst at Google in the San Francisco Bay Area. He also runs the personal finance blog Young and the Invested, a site dedicated to helping young professionals learn about financial independence and entrepreneurship.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.