Wealth Under 40: How Are You Doing?

As you start to save, set money goals, and take on the task of building wealth and achieving Financial Freedom, one of the first questions you'll ask is "How am I doing -- am I on track?" In the military, we have regular performance reviews to let us know how we stack up against others of the same grade in our unit and throughout our branch. But what about with our finances? At a minor level you can also track your performance against financial goals ($5,000 saved towards a new car), but for a better idea of how you're performing, you want to know how everyone else is doing. Let's explore what wealth looks like for Americans under 40 and how you can grow your wealth.

The State of Wealth for Young Adults

According to recent data reported by Visual Capital (link to article), the average wealth of U.S. households under 40 was $259,000 in the fourth quarter of 2023. This is a significant increase from $220,000 pre-COVID, and Millennials, in particular, have seen their wealth more than double.

But this is for everyone under 40, and it's not exactly a "fair fight" to compare your 20-25 year old "just-starting-out" self to someone who is nearing 40 and has been saving for 15-20 years. When you look at only under-35s, the average wealth drops from $259,000 all the way to $183,500 -- and the "median", which is the person who is exactly in the middle of that group, is just $39,000 (link to article).

That means that once you create your first $40,000 in wealth from saving and investing, you'll be doing better than half of all Americans under age 35. And once you hit $184,000, you're already above average and will be absolutely crushing it. But who is really gaining wealth, and why?

Why Wealth is Growing

Several factors contribute to the jump in wealth for young Americans since 2020:

1. Rising Wages: Since 2020 wages have grown 4.7% per year, compared to 2.6% per year from 1920-2020. More income and low unemployment can lead to more wealth.
2. Housing Wealth: Home values have surged 47.1% nationwide since 2020, which has added to the wealth of those who own property. This mainly benefitted Boomers, but about 1 in 3 Americans under 35 own their home and saw an average increase in home equity of close to $60,000.
3. Investment Gains: Since the start of the post-COVID Bull Market, the S&P 500 is up over 150%, one of the best 4-year performances ever. This has dramatically boosted the wealth of Americans who own stock, both in retirement accounts and brokerages.

Who is Benefitting from America's Post-COVID Boom

Clearly the way to grow your wealth depends on three key factors: you have a job, you are invested in the U.S. stock market, and you own a home. But which matters most?

As we've written before, the average savings account balance for Americans is only about $8,000. If you are only working for a paycheck, have average cash savings, and don't own any property or have investments, you are going to find yourself way behind everyone else.

And what if you've followed the "conventional wisdom" and are saving for retirement. The average retirement savings balance for Gen Zers (under 27 years old) in 2023 was just $11,300, and for Millennials (under 40) was $59,800. This is still way below average, although it does at least bring you up to the median, or middle.

To actually catch up and pass "average" for under-35 Americans, you need to have investments -- and own real estate. That requires "diversifying" your savings beyond your Thrift Savings Plan (TSP) to invest using an "after-tax" brokerage account, and saving enough cash to buy your first property.

Wealth-building Advantages in the Military

Enter the super advantages of serving in the U.S. military. The usual talk about military pay focuses on the fact that the average military salary is 30% lower than its civilian equivalent:

• About $24,000 for E1-E3 versus an average of $36,000 for high school graduates
• About $45,000 for O-1s versus $60,000 for college graduates

But because of your service, you have the opportunity to do better than other Americans in your generation thanks to the following programs that more than level the playing field:

1. Tax-free Income. Your Basic Allowance for Housing (BAH) is a tax-free entitlement. The DoD paid over $24 billion in BAH in 2023 to over 1 million service members, meaning the average benefit was about $24,000 --  tax-free. By not paying tax on this income, you will keep an additional $3,000-7,000 in your pocket, on average, depending on your tax bracket.
2. Zero-cost Living. For those of you in the barracks and missing out on BAH, you don't pay rent, utilities, or have to buy groceries for the bulk of your food needs. In 2023, the average single American paid monthly $658 in rent, $138 for utilities, and $333 for groceries. Living in the barracks isn't great, but the yearly value to your budget is about $13,500 in savings.
3. Free (or Almost Free) Health Insurance . In 2023, the average yearly premium (cost) of a standard health insurance policy for a single American was $8,435 for singles and $23,968 for families.
4. The VA Loan. The VA Loan has options for service members and veterans to buy a home with as little as $0 out-of-pocket. With a $0-down option, paying closing costs only, homeownership is accessible via the VA Loan program for just $12,000-20,000 on an average house in 2023.

Taken together, the cash value of military benefits is easily $20,000-30,000 per year, but can be worth $100,000 or more if you include the benefit of a $0-down VA Loan. As a result, the average service member comes out ahead of their civilian peers, and has the resources to build wealth faster.

Building and Measuring Your Wealth

In order to get ahead, there are a few important steps to take:

1. Use a Budget. If you don't have a budget, you're in financial free-fall, and are bound to watch all your goals slip out of your grasp. We recommend following the Military 40:40:20 Rule to save 40% of your pre-tax income each month. This will ensure you save enough for retirement (a minimum of 15%) and have cash for investments, big purchases, and emergencies.
2. Save EVERY Month. Just as DFAS automatically transfers money to your TSP, you need to also automate monthly savings deposits for other goals. Automation is the key to ensuring you stay on track and don't accidentally spend your monthly savings dollars on Five Guys or paintball.
3. Go Beyond Retirement Saving. Invest outside the TSP, including saving cash to buy real estate. If you use the VA Loan once per PCS over your career, you can acquire $2+ million in real estate.
4. Manage Debt. The #1 threat to your financial goals is consumer debt for credit cards or auto loans that steal your cash flow. Pay off your high-interest debt as fast as you can -- or avoid it at all costs. The best way to stay debt-free is a strong Emergency Savings Fund.
5. Plan for Big Purchases. You need to also start a "sinking fund", which is a cash savings account that helps you make large purchases like a new car or a house without financing. At the Military Wealth Coach we call this your "War Chest." Buy your next car with cash, then save the money you'd otherwise pay on the loan back into your War Chest. Within your first four years you should have a car owned free-and-clear, and have another $10,000-20,000 to buy your first house.
6. Financial Education. Invest in yourself by continuing to learn about finances and investing. Just 50 hours of financial education has been shown to result in over $100,000 more in net worth. If you dedicate 30 minutes a day (or more), you'll be on the fast track to wealth in no time.
7. Wealth Mentality . The last key is to fix your mindset. Stop thinking of your self-worth as having anything to do with how you look on the outside to stop spending wastefully on stuff. Focus on your progress towards Financial Freedom, and remind yourself to "aim for the average, but live like the median." For example, a 25-year-old would set a goal of passing $259,000 in net worth as soon as possible, but continue to live like you're only worth about $20,000.

Conclusion

To assure your Financial Freedom, you need to set goals to quickly reach and surpass the average net worth of the $259,000 benchmark. In fact, you can and should be much more ambitious: become a millionaire before your 40th birthday. Being average will never reach Financial Freedom.

If you follow our Military 40:40:20 Rule to save and invest 40% of your pre-tax income every month, and if you follow the Military Wealth Coach Flight Path for balancing retirement and non-retirement savings, you will accomplish that goal. Our system can help you generate at least $1.5 million after a 20-year enlisted career, and at least $2.1 million at the end of 20 years of commissioned service.

For more, visit us at www.militarywealthcoach.com for military-focused tips and financial hacks. Or pre-order our course or purchase a coaching program to get started on your wealth-building mission today.