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Avoid being poorer than your parents

Photo: NY - http://nyphotographic.com/. Cropped. Licence: https://creativecommons.org/licenses/by-sa/3.0/

There is much debate about whether Millennials will end up being poorer than their parents. According to a recent study, between 2005 and 2014 real incomes for 70% of people in the developed world either fell or flat lined. This is in direct contrast to the period since World War II when, except for a blip in the 1970s, real incomes across the developed world enjoyed significant growth.

Looking ahead, there is a real risk that today’s young people will end up being poorer than their parents. This is partly because of an uncertain economic outlook. The US economic recovery is likely to be held back to at least some degree by rising interest rates, while China’s growth rate is expected to fall over the medium to long term as it transitions to a more consumer-focused economy.

However, another key reason for the prospects of Millennials being poorer than their parents is a rising population. Between today and 2050, the world’s population is expected to increase by around a third to 9.7bn people. This could cause pressure on resources as well as on jobs, healthcare and property to increase and mean that today’s younger people have lower real incomes than the previous generation.

Clearly, there is nothing one individual can do to change world population growth or positively catalyse economic growth in the coming decades. However, an individual can adopt a sound approach to their own finances in order to improve their chances of becoming richer, as opposed to poorer, than their parents.

Perhaps the first place to start is with regard to budgeting. It is easy to live in the moment and spend the vast majority of a pay check each month. However, this will not improve your chances of becoming richer than your parents, since it leaves little capital left over to be invested for future growth. As such, the idea of living within your means remains a central part of building wealth.

Undoubtedly, it pays to start saving and investing at a young age. Certainly, it is never too late to adopt good financial habits, but they tend to come easier at a younger age. Plus, it leaves more time for the effect of compounding to have an impact on your finances. By starting to invest at 21 rather than 31, you could have earned an extra 116% assuming an 8% annualised return on an investment.

Of course, generating a higher return than 8% is very achievable in the long run. Buying high quality stocks when they are trading at discounted prices could allow an investor to beat the return of the wider index. And through buying during more uncertain periods such as in the midst of a recession, it could lead to even higher returns over the long run.

Therefore, while the chances of you being poorer than your parents may be high, it is possible to end up being richer than the previous generation by following a few simple steps.

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