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Young workers can 'push further out on the risk spectrum' to build wealth, says personal finance director: Here's how

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Key Points
  • Young investors are told that taking more risks early on can help them grow wealth over the long term. The same logic can apply to young workers.
  • "It comes down to how flexible you can be, which you invariably are when you're younger," says Morningstar's Christine Benz.

When it comes to building wealth, young investors are told over and over that they'd be wise to take advantage of their heightened capacity for risk. Over the long term, the thinking goes, riskier assets have the potential to deliver higher returns. The younger you are, the more time your portfolio has to withstand the temporary bouts of volatility that come with such investments.

But what about the other way you build wealth — you know, your job? Young people would be wise to take risks there early on, too.

"Your human capital — your earning power over your lifetime — is a form of wealth as well," says Christine Benz, director of personal finance and retirement planning at Morningstar. "Young people have an opportunity to push further out on the risk spectrum by taking career risks. It comes down to how flexible you can be, which you invariably are when you're younger."

Hunt high-reward career opportunities

The fewer obligations you have, the more risks you can take with your career choices, says Renata Dionello, chief people officer at ZipRecruiter. "If you're younger, you likely have fewer financial needs. Maybe you're not married and you're not providing for others. You're not worried about living in a good school district or paying a mortgage," he says. "That puts you in a position where you might be able to take more risk."

One form that risk may take, she offers, is taking a gig at an earlier-stage company that offers a lower salary upfront but that comes with stock options that could grow in value over time. "That can help both in terms of growing your career more quickly and also in wealth generation," she says. "It's an obvious risk because you're tying much more of your personal success to the success of the company."

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Another option is using the early part of your career to explore as many opportunities as possible. Gone is the notion that spending your early career at several different companies would be a red flag for the next company looking to hire you, says David Hehman, chief financial officer at FlexJobs. "That's out the window," he says. "The average length that someone stays these days is fairly short."

In fact, changing jobs is one of the best ways to improve your salary. Since 2011, wage growth for people who switching jobs has outpaced growth among folks who have stayed put, according to the Atlanta Federal Reserve Bank's wage growth tracker.

Entrepreneur and podcast host Mandi Woodruff-Santos, for example, talks about how she upped her salary significantly moving through a series of new positions. As a result of the calculated risks she took, her net worth grew from $70,000 to $700,000 over 5 years.

Push for advancement at your current job

You needn't take a new gig to take risks that can boost your earnings power, though, points out Eyal Danon, a career coach and author of "The Principle of 18." His book, which divides life into five 18-year periods, posits that workers would ideally spend until age 36 focusing not on money but on finding a career fit, honing skills, and building a professional network.

From there, he says, you enter your "builder" phase, when you can harness your credibility, experience, and expertise into calculated risks that will advance you up the ladder in your career.

Danon offers three basic guidelines for the kinds of risks worth considering that could land you higher pay and more promotions.

1. Go for something new and untested: "Many times, you'll have the urge to try to fix a problem many people have tried to fix," he says. "You may think you have the best idea to make it work, but there is a reason other people have failed."

Instead, he says, focus on taking your firm into uncharted waters. If you're working at a small supplier, try to land a first-of-its-kind partnership with a big client, for instance, he says.

2. Assess the impact: Consider the potential positive ramifications of any risk you're taking. "There are four areas any business deals with: growing the business, reducing risk, increasing customer success, and increasing efficiency," Danon says. "Consider how making a significant project real would affect those goals, and go for things that have an outsize impact."

3. Prepare diligently: Before making a proposal to your superiors or implanting a new project or initiative, make sure you're prepared for eventualities. Danon recalls the time he reached out to CNBC for an interview when he worked in marketing for a relatively unknown tech company. "With my own money, I had already paid for media training," he says. "You can't prepare for the outcome of your risk, but you can create a process."

Balance risk across your larger financial situation

Whether you're making bold moves at your current job, leaving to join a start-up, or quitting your gig to start your own business, it may be wise to tighten the screws in other aspects of your financial life. That's because if you pile on too many risk factors and something goes awry, you may be forced into debt to cover your losses.

One way to avoid this, suggests Benz, is to bolster your emergency fund in preparation for any life-changing move. "If I were joining a startup or doing something entrepreneurial, I would try to enlarge that cash buffer beyond three to six months to accommodate whatever might happen, be it a layoff or a few lean years," she says.

"To the extent that you can, you would also want to avoid taking on any big new financial obligations, such as buying a home at the top price point."

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Another way for career risktakers to ensure that all of their eggs aren't in one basket is to make sure their portfolio isn't too heavily weighted to one type of business. For those receiving large portions of company stock as part of their compensation , that could mean selling in favor of a more diversified portfolio, says Benz. "Generally speaking, I think it's a good operating principle to think about reducing exposure as you acquire company stock as soon as there is a tax-efficient way to do so."

The same principle applies to someone who runs their own business, she adds. "People's investing portfolios should take into account their whole financial lives," she says. "Say I owned a successful chain of dry cleaners. I'd be leveraged to a specific geographic locale and a certain type of business. Ideally, I'd want to use my portfolio to offset some of those idiosyncrasies."

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