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Homeownership has long been the American dream. But for many millennials (roughly ages 25 to 39), that dream appears out of reach due to poor credit scores, student debt, and unaffordable housing prices.
That raises the risk that many young adults won't achieve financial security. After all, buying a house remains the chief path to building wealth for most Americans, with home equity accounting for the biggest portion (PDF) of household net worth.
Instead of building equity, many millennials are renting or living with their parents. In 2018 more than 1 in 3 renter households was headed by someone under age 35 vs. just 1 in 10 homeowner households, according to recent research by the Harvard Joint Center for Housing Studies (PDF).
Although a growing number of millennials have begun to buy houses, their homeownership rate, which reached 38.4 percent in 2018, is 6 percentage points below that of previous generations, says Jung Hyun Choi, a research associate at the nonprofit Urban Institute.
The good news is that you don't need to own a home to achieve your financial goals. “Renting can be its own path to financial security,” says Kevin Mahoney, a fee-only certified financial planner in Washington, D.C.
But you do need a plan, as we'll explain.
The Real Value of Homeownership
It may seem counterintuitive, but the biggest financial benefit of homeownership isn't about the house itself. "Owning a home encourages a discipline and savings mindset that is key to building financial security," says Jay Abolofia, a fee-only certified planner in Weston, Mass.
Certainly the value of the home matters, too. But home prices historically have tracked inflation over the long term, with booms and busts along the way. Throughout, you'll pay hefty costs, including maintenance, property taxes, and insurance.
“Home ownership is more of an expense than an investment until you sell, perhaps at retirement, and find out how much equity you can tap,” says Abolofia.
Because of those mortgage payments, homeowners are pushed to live within their means and consistently set aside funds, which helps to build wealth, says Ryan Firth, a CPA and fee-only financial adviser in Houston.
But renting has financial advantages as well. In many high-cost areas, renting is more economical than buying and paying for the upkeep of a home. That means you’ll have more cash that can be funneled toward your financial goals.
Renting also offers more financial flexibility in the event you have to move, says Mahoney. That’s especially likely for young adults, who may see many life changes, such as switching jobs or getting married, in the space of a few years.
What to Do
The smart strategy for renters is to take advantage of their financial flexibility while adopting the good money habits of homeowners. Just follow these guidelines to create a savings program.
Develop a saving mindset. Start by scrutinizing your budget to free up cash. You'll need to separate your essential costs, such as rent and utilities, from discretionary spending—eating out and travel vacations, perhaps. You'll get the most impact by trimming big-ticket items, but don’t overlook smaller expenditures, which can add up, such as your streaming subscriptions.
If you don’t find much wiggle room in your spending plan right now, don’t be discouraged.
“Saving is an activity, not an amount; what’s more important is to develop the long-term behavior of saving,” says Patricia Sullivan, assistant director of capacity building at The Financial Clinic, a nonprofit group working with low-income families.
Focus on stashing away whatever you can, even if it’s just a few dollars a week. Gradually increase those amounts as you get raises or receive windfalls. Your goal is to funnel the money you would be putting into paying down a mortgage into savings.
Tackle your debts. It may feel like you’re not making much headway on savings if you’re saddled with debt, as most millennials are today. But look at it this way: If you’re managing to pay those amounts down, that’s a form of investing, too.
“Your debt payments give you a guaranteed rate of return, similar to the buying a bond with that interest rate,” says Abolofia. For example, wiping out the balance on a credit card with an 18 percent interest rate is equivalent to earning an 18 percent return on that money.
Many planners suggest paying down your higher-rate credit card debt first. But some people get more satisfaction by tackling smaller balances, even if they carry lower interest rates, because they can be erased more quickly. Either way, keep reducing those balances.
Make the most of your 401(k). If your employer offers a 401(k) retirement plan with an employer match—and most do—aim to contribute enough to get the full amount. It’s free money that can grow tax-sheltered for the long term.
Aim to increase the amount you stash away over time, perhaps by 1 percent or 2 percent a year. Most plans let you schedule these increases automatically, and you probably won’t notice the difference in your paycheck.
If your cash flow allows it, stash additional money in a Roth IRA, says Abolofia. Although those dollars are contributed after-tax, you will probably be a low tax bracket, and that money will grow tax-free. Plus, you can withdraw the Roth IRA contributions at any time without penalty or tax, which gives you liquidity.
If you don’t have a retirement plan at work or you’re self-employed, you can save on your own in an IRA or a solo 401(k), which lets you stash away significant amounts in tax-sheltered accounts.
Earn higher rates on your savings. Long-term savings are great, but it’s also crucial to build short-term savings, whether for an emergency fund, a wedding, or a down payment.
To get the best return on that money, opt for an online savings account, which will likely offer a higher interest rate than a walk-in bank, says Ashley Dixon, a fee-only certified financial planner in Colorado Springs, Colo.
American Express High Yield Personal Savings and Marcus by Goldman Sachs, for example, were recently paying a 1.7 percent interest rate. By contrast, the average national interest rate on savings accounts is just 0.09 percent, according to the FDIC.
You can compare savings account rates online at websites such as bankrate.com and depositaccounts.com.
Invest in your career. Building financial security isn't just about saving; you also need to keep your income growing. That may mean changing jobs, perhaps by switching employers or shifting to a new industry.
Many young adults are likely to switch jobs in the next few years, according to a recent Gallup survey. Only half of millennials said they planned to be with their employer one year from now, and 1 in 2 said they would consider taking a job with a different company for a raise of 20 percent or less.
As noted earlier, renting has an advantage over owning a home when it comes to navigating these changes, because you have the flexibility to move. If you have to sell a house, perhaps at a loss, it can be difficult to make a career switch, says Mahoney.
Renters may also find more cash in their budget to pay for classes or go after a graduate degree, which may improve their job prospects. For renters, just as with homeowners, it helps to plan for the long term.
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