If you’re young and earning big money, know the difference between “rich” and “wealthy”

Mike Fannin - Carrick WealthBy Mike Fannin, Director: Operations at Carrick Wealth.

The global wealth demographic is increasingly inclusive of Millennials, young adults born roughly between the early 1980s and the early 2000s, some barely out of their teens, and others approaching midlife. Inevitably this raises the question, just how well-equipped and prepared are many of these young adults to manage, grow and protect their wealth?

As the old adage goes, fortunes can be quickly made and just as quickly lost.

According to Forbes.com it is expected that some $30-trillion in wealth will be transferred from so-called Baby Boomers to Millennials over the coming decades. They are expected to be the largest adult segment in the wealth and luxury category by the end of this decade. Yet, as Forbes notes, research has shown that only 22% of Millennials demonstrate “basic” financial knowledge.

This puts young adults and their newly-acquired wealth at considerable risk – whether they are earning high salaries, are successful entrepreneurs, have inherited significant wealth, or have in a very short time become very successful and wealthy like, for example, many entertainment stars, athletes or IT  whiz kids.

Horror stories abound of young celebrities and others who made fortunes almost overnight, and then lost it all before they turned forty. And a study conducted by the Williams Group wealth consultancy in the US shows that 70% of wealthy families lose their wealth by the second generation, and an even more astounding 90% by the third. Nobody wants to be part of these sad statistics.

To illustrate the point, just consider the following hard-luck stories. The rapper 50 Cent quickly earned a $155-million fortune, but by July 2015 it was gone and he was bankrupt.  Another young rap artist, MC Hammer, earned a $30-milion fortune with his chart-topping hit songs in the 90s, then filed for bankruptcy six years later with debts of more than $13-million. The late Michael Jackson was $500-million in debt when he died a few years ago, despite selling millions of records as a young entertainer and owning the lucrative rights to the Beatles’ catalogue.

There are many examples of young people for whom success and money came early, but with big and unnecessary expenses attached – flashy cars, properties and all the other trappings of an A-list lifestyle – and before they know it they could no longer pay the bills.

Most of them lost their money due to extravagant and wild lifestyles, living beyond their means, spending excessively, not caring about tomorrow, listening to bad advice, or entrusting their money to unscrupulous managers and ‘advisers’. They would also easily fit the profile of the 78% of young Millennials who lack basic financial knowledge.

Even if you are a young professional earning a high salary each month, you are not immune to these pitfalls. As I told radio listeners on Kaya FM 95.9’s Influential Fridays show last week: there is a big difference between being rich and being wealthy, or between having a large income and being wealthy.

The difference lies in attitude, and what you do with your money. For instance, do you live beyond your means, spending extravagantly and recklessly, making debt easily, or trusting bad advice and take a short-term view not worrying about the future? Or do you take a responsible long-term view, planning for and investing in your future, making sure your wealth is growing, is protected, and will be preserved?

Take the young professional, for example, earning R70,000 per month, enjoying the finer things in life like owning an expensive home, a top-of-the-range luxury car, expensive designer watch and clothes, a custom motorcycle and a motor boat for weekends, takes regular overseas holidays with his family, always flies business class, always eats out in the best restaurants, and has nothing left to save at the end of each month. Compare him to a young artisan or entrepreneur earning R25,000 per month, who lives modestly in a small family house, drives a good second-hand car, takes occasional short budget holidays, eats out once a month at affordable family restaurants, travels economy class, and started saving the day he started working.

Of the two examples I have used, the professional is rich, having a large income, but living pay check to pay check  and having no wealth that is growing; while the artisan is the wealthy one who lives within his means, saves and makes his money work for him with a view to the future.

A very worrying statistic I came across makes the point that out of every hundred people who are currently 30 years old, only one of will have enough money to support themselves at retirement. This is because of the illusion among many younger people that retirement is so far off in the future that they don’t have to worry about it now. Lavish spending right now, means you are spending away your future and you will end up without a pension or the necessary retirement savings to afford a comfortable life style and your financial freedom when you are older and need it most.

It is not only your own future as a young individual that is at risk. You may not have children yet or they are still very young, but your children will have to go to school and possibly university one day. Yet with education inflation setting in at such a rapid pace, you won’t be able to afford it unless you start saving now. How will you explain that to your children? (Read our article on this topic here.)

While you will benefit from changing your attitude and your habits to those of people who are not just rich but who are actually wealthy, investing in good advice will also serve you well, and is another thing wealthy people do.  But make sure you speak to a reputable, qualified financial adviser. With your adviser, plan and invest carefully for the future.

Even if your spending habits are not that extravagant, you could suddenly lose the ability to continue earning the kind of money you have become used to – so you need to insure for the future with a long-term savings and investment plan.

Here are some useful tips for doing this. Work out exactly what you want from life, your whole life, and for your family. Get good advice and don’t invest impulsively or emotionally. Take charge of your life and financial future, and have a long-term plan. Unlock your wealth through integrated planning and diversified investment. Devise a strategy with your adviser to achieve your goals.

Implement your strategy and regularly review it with your financial adviser to see if it is still on course. Have your financial adviser explain all the options to you, such as equities, pension plans, savings plans, money markets and foreign exchange, investing in property, the different asset classes, tax efficient investment, getting past short-term volatility with a long-term investment horizon, and diversifying your investment to hedge against shocks. Above all, diversify.

Adopt the habit of the wealthy to read and upskill yourself. Understand the long-term consequences of sustainability of your chosen lifestyle when you reach retirement. Learn to grow, protect and preserve your wealth. Finally, avoid the serious mistake of living like a king when young, and retiring a pauper when you are old.

If you are a young high net worth individual who wishes to learn more about how you can be wealthy and not just rich, contact us at mike.fannin@carrickfs.com and one of our qualified advisers will be in touch.

Mike Fannin
Director: Operations