'Millionaires are made in their 20s and 30s,' expert says — here's how


The money moves you make right out of school, and over the next 10 years, can make a huge impact on your wealth as you age, and to whether you can eventually reach millionaire status.

"Millionaires are made in their 20s and 30s, not their 50s and 60s," says Fred Creutzer, president of Creutzer Financial Services in Maryland. So start developing a financial plan early and make sure it includes benefiting from the power of compound interest. "If you wait until you're 50, you're never going to catch someone who started at a young age. When it comes to investing, the early bird always gets the worm."

There are nearly 12 million households in America with a net worth over $1 million. Many of these millionaires achieved that goal the tried-and-true way: They started investing when they were young and kept at it the rest of their career.

And young folks today are going to need the money. A Grow analysis finds that a 25-year-old earning $50,000 today could very well need $1.6 million saved in order to retire comfortably.

Here's how to set yourself up for financial success.

Take advantage of the power of compounding

A 25-year-old who invested $5,000 per year until the age of 35, assuming an 8% annual return, would amass around $787,000 by the age of 65. However, someone who started investing $5,000 per year at the age of 35 and continued until they were 65, with the same annual return, would only amass around $612,000.

That's the power of compounding growth. Those dollars invested in your 20s have much more time to grow in value.

This classic example of compounding growth or interest from the Federal Reserve Bank of St. Louis has the 25-year-old ending with a 25% larger final balance despite 20 fewer years of investing.

Young people have lots of smart, tax-advantaged investment vehicles to choose from when saving and investing money for the future. Among your options are a Roth IRA, or individual retirement account; a traditional IRA; and a 401(k). 

Under the right circumstances, you actually could save $1 million or more in a 401(k) workplace retirement account if you get an employer match, for less than $100 per paycheck.

Everyone's situation is different, of course, and goals will vary by person. For that reason, it may be best to take a more personalized approach to your saving strategy. Play around with a retirement calculator, like the one from Grow, to figure out how much you think you'll need and to set some goals that make sense for you.

Take more risks while you're young

Millennials are notorious for being reluctant investors. More millennials think high-yield savings accounts are a better long-term source of growth than the stock market, according to a recent Bankrate survey. And boy are they wrong: Over the past 40 years the S&P 500 has posted an annualized return of 11%.

Older investors nearing retirement often shift to conservative investments to make sure market bumps don't keep them from their goals. But young investors don't need to fear a possible bear market, or even a recession: They have plenty of time to ride out a downturn. If anything, they should consider investing more when prices are lower and they can feel free to take more risks.

Provide yourself with an emergency fund

One of your first financial priorities should be to set yourself up with an emergency fund, experts say, so that you can manage a crisis without having to take on debt.

Four in 10 Americans couldn't handle a $400 emergency expense without selling something or borrowing, according to a 2018 report from the Federal Reserve. Yet crises can be both costly and common: Over a quarter of adults said that they, or a close family member, experienced one in the past year, and the average cost was $3,518, according to a recent survey from Bankrate of 1,015 adults.

Ideally, your emergency fund could sustain you for 3-6 months. Even getting to the point where you have $500 or $1,000 in savings for when you need it, though, is great. 

The most important thing, Greg McBride, chief financial analyst for Bankrate, told Grow, is to start by saving whatever you can and to get into the habit of saving consistently. "There's the destination, and then there's the starting point," he says. "The destination is enough to cover six months worth of expenses, and that in itself is a moving target."

How to make your home-buying dream a reality

Video by Jason Armesto

Consider buying a home to build equity

For many 20- and 30-somethings, real estate can seem out of reach. But more young people are becoming owners of their own homes: Millennials are now the largest group of homebuyers, according to a report released this year by the National Association of Realtors. And those who do manage to buy real estate relatively early can reap long-term rewards.

While rents climb, homebuyers who get fixed mortgages can lock in their monthly payments. And if they pay a little extra on that debt, they can even eliminate that mortgage payment from their monthly budget altogether.

"They start building equity versus giving rent money away with nothing to show for it," Creutzer says. But the benefits of homeownership aren't as pronounced if it means they can no longer afford to invest in the market, he adds. So if you want to buy a home, make sure you're in a solid financial situation and you can still put away what you need to for a comfortable retirement.

Avoid lifestyle creep

It's normal to want to splurge with that first paycheck or to celebrate once you get a promotion. But overspending can set you back, and even land you in debt, especially if you're spending more money than you make. Lifestyle creep can be costlier than you think, in other words, especially if you aren't already saving and investing the 10% to 15% of your yearly income that many financial advisors recommend to make sure you're set for the future.

It's smart and useful to try to increase your income. If you do manage to boost the amount of you make, though, remember to keep making money-savvy choices. Instead of buying that flashy new car, for example, maybe look at a pre-owned car with reasonable mileage at a much lower cost.

And the next time you get a raise, aim to boost your retirement contribution so that you don't get used to spending all of that extra money in your paycheck.

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