Young Wealth Builders

Young adults are taking care of business when it comes to personal finance. Despite reports about their financial illiteracy and indifference, some have learned from the financial meltdown of 2008 that a secure financial foundation is essential. A 2011 survey by a division of JPMorgan Chase and U.S. News &World Report shows that young adults (age 18—34) are concerned about responsible money management and want to pay down debt, spend less, save more, and create a budget. Of the 1,000 young adults surveyed, 54% said they wanted to save money.

More young adults are beginning to understand that earning a high salary doesn’t automatically equal wealth. “There’s a tendency to equate high income with wealth,” says Lanta Evans-Motte, financial adviser at Raymond James, a diversified financial services holding company. “Certainly, having a high income gives you greater ability to accumulate wealth, but it’s not automatic. Wealth creation must be deliberate.”

Here are three people in their thirties who are on their way to creating wealth.

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The Boss: Kanyessa McMahon

Kanyessa McMahon recognized an opportunity and jumped on it. In 2008, after a frustrating four-month stint working at a video production company, she acted on her entrepreneurial aspirations.

“I was 25 at the time,” says McMahon. “My job wasn’t working out because I wasn’t getting paid on time. My paychecks were bouncing, and my skills weren’t being utilized.” McMahon left the company and, through an industry connection, acquired her first client–Nike. The 30-year-old now calls the shots as head of her own production company.

“Most people who become wealthy do it through entrepreneurship,” says Evans-Motte.  A recent study by U.S. Trust, which surveys high-net-worth and ultra-high-net-worth Americans, revealed that 84% of the survey’s 450 wealthy respondents earned their wealth themselves.

As CEO of New York City-based Suddenly There Productions, McMahon manages brand content for Nike, Adidas, and MTV. She is currently working on a project producing and directing videos for Adidas as its global online brand content producer.

Suddenly There Productions was up and running just a few weeks after McMahon quit her job. Her only startup cost was the $200 filing fee required by New York State to form a limited liability company. She already owned all the equipment she needed for her business; photography, computer, and video equipment had all been purchased while she was a student. McMahon completed her bachelor’s in photography at Pratt Institute in 2004 and her master’s in media studies at the New School in 2006. Her clients provide her with a production budget, which covers contractors and the costs of producing and editing videos.

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McMahon’s company has been profitable from the start. Last year’s revenues reached $250,000, and 2012 revenues are projected to total $300,000. McMahon has drawn a salary of $100,000 each year she’s been in business. “I reinvest [the rest of the] profits back into the company by purchasing new equipment and bringing in others to train so that the company can grow and take on more projects.”

McMahon practices responsible money management by saving 15% to 20% of her salary.  She also walks to and from work and eats lunch at home. She and her husband, Liam, work with a financial planner to assist them with retirement planning and disability and life insurance policies.

Although annual revenues for women-owned businesses typically stall at the $250,000 to $499,000 mark, McMahon expects the company to be around for the long haul. “In five years, I hope to have the resources to take on more clients and to one day become a million-dollar company.”

McMAHON’S TIPS:
Hire a financial team. McMahon advises hiring professionals to oversee both your business and personal finances. Her team comprises an accountant, attorney, and financial planner.

Keep operating costs low.
McMahon kept costs low the first three years by working out of her apartment.

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Prepare for unexpected slowdowns.
McMahon says she makes accurate cash flow projections by adhering to a strict budget and preparing for the unexpected. “I structure my budgets to account for any emergencies.” She also has a zero-balance low-interest business line of credit available if she needs it.

The Real Estate Investor: Marcel Umphery
It was the fall of 2002 at Morgan State University in Baltimore. Financial aid refund checks, the college student’s version of a lottery payday, had just been disbursed. All of Marcel Umphery’s friends bought Coogi gear and Prada shoes, purchased the latest PlayStation and Xbox games, or planned spring break vacations to Florida, Cancún, or some other sunny locale, but Umphery did not. Instead, he used his financial aid refund checks to invest in property.

“I learned about investing from a friend,” says Umphery, now 31. The friend, a fellow student at Morgan State, told him about tax sale certificates of property that

become available if the property owner hasn’t paid his or her taxes. Umphery bought his first certificate–in effect paying the property taxes–for $850. “I sold [the property] 21 months later for $25,000,” he says. “I reinvested the profits to buy more certificates.” When the financial crisis hit in 2008, Umphery slid into a rough patch. Positioned to sell seven properties for $1 million, he lost $250,000 instead. However, the recession and the depressed housing market did not discourage him. “I toughed it out and focused on buying for much less than before, and the prospect of the homes appreciating in five to seven years,” he says. “I took advantage of the declining market.” Umphery now has real estate investments worth $450,000. Rental income from his five properties brings in $4,100 each month. “I allocate money from my monthly income for any repairs or vacancies, and I save what’s left over. I’m netting [more than] $1,000 a month.”

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To learn more about the basics of personal finance and real estate investing, Umphery read books such as Rich Dad Poor Dad (Business Plus; $7.99), Think and Grow Rich (Tribeca Books; $12.80), and Start Late Finish Rich (Crown Business; $14.95). He also attended workshops and seminars, and while a student interned at a real estate company.

“If you’re just starting out, consider purchasing a duplex,” says Sheryl Ridley Dorsey, owner of Ridley Dorsey Certified Public Accountants. “It’s possible to live rent-free if you rent out the other space. Take the profits and buy a single-family home for yourself, and rent out the whole duplex.”

UMPHERY’S TIPS
Educate yourself about a potential property.
Before buying property, Umphery says he pays attention to things such as neighborhood crime statistics and how much is charged for rent. “Most rental neighborhoods have higher crime stats than neighborhoods that are mostly owner-occupied,” he says. Crime statistics can be found on your local police department’s website, and rent estimates can be found on sites such as Zillow.com.

Screen prospective tenants.
“I use an online resource called ResidentCheck.com. This site is fee-based [less than $100 a month, depending on the number of screenings], but provides me with eviction records. I sometimes also have prospective tenants provide tax returns and pay stubs so I can verify income.” Umphery suggests familiarizing yourself with laws about tenants’ rights and your responsibility as a landlord; see the U.S. Department of Housing and Urban Development website (www.hud.gov

) for more information.

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Save for emergencies.
Make sure to set aside money for repairs and other emergencies, such as a vacancy. “I have money set aside for a handyman to work on properties that need repairs,” says Umphery. “When renovating, I hire licensed electricians, plumbers, and roofers.”

Consider an exit strategy.
“An exit strategy is the approach used to terminate one’s involvement with an investment, such as real estate,” says Ridley Dorsey.  “Examples of real estate exit strategies include outright sale of the property. In this economy, you have a lower capital gains tax rate, if there is a profit. Another example is a 1031 Exchange–in other words, exchanging your real estate property for a like-kind. It generally allows you to avoid or reduce your capital gains tax rate. This approach should be used if you wish to remain in real estate, but not with that investment.”

The Saver: Tiffany “The Budgetnista” Aliche

As a child growing up in Westfield, New Jersey, Tiffany Aliche learned the value of saving from her parents, Irondi and Sylvia Aliche. Her dad, who was the chief financial officer for a nonprofit, presided over weekly family meetings in which they discussed how to use the phone less and reduce electricity and water consumption. Her mother and other women in the neighborhood swapped gently worn children’s clothing; they rarely bought new clothes. Her mother also clipped coupons, bargain shopped, bought bread from factory stores, and purchased food in bulk and placed it in the family’s deep freezer.

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Her parents’ meticulous budgeting laid the groundwork for Aliche’s own commitment to saving. At the age of 25, she’d saved $40,000 to buy her first home. She roomed with one of her sisters, paid cash for a car, and saved one third of her $35,000 annual teacher’s salary for three years straight. Her successful saving habits earned her the moniker “budgetnista,” given to her by her little sister Lisa.

Aliche, author of The One Week Budget (Create Space; $14.99) and owner of CLD Financial Life, now has more than $22,000 in savings in her iGoBanking online savings account. Her savings strategy is incorporated into her overall financial plan. She saves at least 10% of her $55,000 annual income as a self-employed entrepreneur. She invests 10% in her SEP IRA with Lincoln Financial and still has $52,000 in her 403 (b) retirement account from her days as a teacher. She has $6,000 in the IRA.

“As soon as I receive any income, I immediately break it down into percentages and transfer the funds into their designated accounts,” says Aliche, now 33. According to George Barany, director of Young America Saves, the best saving strategy is to set a goal, develop a plan to reach it, and save automatically thereafter. Depending upon their income, young people should save at least 10% each pay period. If you can’t do that, save something–even if it’s $10 to $25 per paycheck. As you reach each savings goal, set the next one. Take advantage of direct deposit and have a set portion sent directly to your savings account.

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“Wealth is a measure of net worth, and in order to have some wealth, a person needs to have more savings and assets than debt and expenses,” says Barany. “Saving as a pattern of behavior can support the opportunity to build wealth. Without saving, it is very difficult to build wealth.”

ALICHE’S TIPS
Automate.
“Open an online savings account,” Barany advises. “This will help put distance between you and your money. Use Bankrate.com to find the best savings account, then automate the transfers.” Barany also urges young adults to develop relationships with their local banking community and recommends using direct deposit. “Utilizing direct deposit to save automatically is the best strategy available to anyone,” he says. “If direct deposit is not available, make a deposit the first week of every month.”

Take a second look.
“Look up local thrift and secondhand stores in your area. Keep in mind, the better the neighborhood, the better stuff you’ll find. You’ll save hundreds of dollars a year by letting someone else buy new stuff that you can get for pennies on the dollar later,” says Aliche.

Use cash.
“Cash will allow you to negotiate prices and help keep you from overspending. You’ll save on finance fees that can double or triple the cost of an item.”

Do it yourself.
“I love YouTube because if you want to learn how to do anything, it offers a comprehensive video. I’ve learned how to paint, lay tile, program my phone, and I even take yoga classes every morning via YouTube.”