Mom and Dad Know Best: Old School Wealth Management

For young families and professional struggling to build up their financial health in the wake of, “the biggest economic downturn since the Great Depression,” any advice helps. A report from the Federal Reserve Bank of St. Louis written by William Emmons and Bryan Noeth, suggests that the best advice may come from a familiar source: good old mom and dad. The report by Emmons and Noeth found that, “while young households are more likely to have more education than older generations, they are also not as likely to acquire as much wealth as their elders.” Balancing your budget to mimic the saving habits of older generations could help young adults build their wealth today. What are the wealth management habits of older generations? Emmons and Noeth found a few that were particularly important, listed below.
One of the keys to old-fashioned wealth management is to keep and maintain an emergency fund. The average family today, where the head of the household is under 40, has roughly $14,000 in safe, accessible, inexpensive, liquid assets. Comparatively speaking, older families headed by someone between 40 and 61, have roughly $46,000 in liquid assets. Lastly, families headed by someone 62 and older have nearly $83,000 saved up in an emergency fund. An emergency fund helps anyone minimize financial shocks and risk. Sometimes unexpected career changes, a sudden illness, or home repairs can hurt our finances. A well stocked, rainy day fund helps mitigate the shock and damage, to keep you and your family on track.

Another common sense wealth management tip is paying down debt. A household with a lot of debt on the balance sheet is a household at risk for financial shock. Emmon said, point blank, that, “having a lot of debt automatically raises the risk that something bad could happen to you.”

Furthermore, devote the money you can to high-return investments. The researchers found that “investing in a high-yield asset, such as stocks or a small business, can lead to greater wealth on average over time due to lower volatility for any given level of expected return.” While a portfolio of tangible assets, like a house or car, is good and necessary, high-return assets reduce the likelihood of financial distress.

Cue your grandparents’ voices for this tip: wait until you can afford to buy a home. If a young adult is willing and able to delay the purchase of a home (and the debt that comes with it), they could afford a house with a significant down payment and still have enough money to invest in other assets with higher returns. As a result, waiting to buy a home can enable you to create more wealth later. Homeownership is important and valuable, but it is also burdensome. Young adults are increasingly waiting to buy a home until their finances can measure up to the debt burden.

While most of these tips seem simple and straightforward, a financial review of your wealth can help explain the specifics: how much should you save, where should you invest, and how quickly can you pay down debt? Apex’s financial team can analyze your finances and portfolios, and come up with a customized wealth management solution that fits your family’s needs and goals.