First-generation Americans need to start building wealth — here's how they can do it

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When you’re a first-generation American, building wealth can be quite difficult. Your family is navigating an unfamiliar financial system and you’re trying to teach them while also teaching yourself. What’s more, many of our families only learn how to do the necessary basics to survive — open a savings account and pay down debt — but they don’t learn how to thrive.

According a report from the St. Louis Federal Reserve, the median income of a foreign-born American is $20,400 a year, while a native-born American makes $28,000, so immigrant and first-generation families tend to have a longer way to go to amass wealth.

Here are some ways you can start making your money work for you so you can build long-term wealth.

1. Start building an emergency fund

Unexpected expenses may pop up from time to time, so one of the best things you can do is make sure you’re financially prepared for them. An emergency fund is money that you use for unforeseen expenses, like a medical bill, job loss or an unexpected home repair.

It can be a crucial part of wealth building because it is designed to help you cover these surprise costs without having to take on additional debt. So instead of defaulting to a credit card or a personal loan to pay for an emergency, you can pull from a fund you saved specifically for these instances.

It’s also a good idea to encourage your family members to create emergency funds for themselves as well. Being a first-generation American often means carrying the expectation that you’ll intervene financially if your parents or siblings need the help. And while it’s important to lend a hand when you can, you can still wind up stretching yourself too thin when you’re always using the money you saved to help others.

Experts typically recommend having three to six months’ worth of expenses in an emergency fund. So if all your necessary expenses for the month (like, rent, food, utilities, bills, medications, etc.) add up to $2,000, you should aim to have an emergency fund that’s around $6,000 to $12,000. It seems like a lofty number, and though it may take a while before you have a fully funded emergency savings account, the money will come in handy when you need it most.

Pro tip: Save your emergency fund in a high-yield savings account so your money can earn interest and grow a little quicker — even when you aren’t making contributions to it. Currently, Ally Online Savings Account and Marcus by Goldman Sachs High Yield Online Savings both offer 0.5% APY, which is a lot better than the interest rate on a traditional savings account.

Ally Bank Online Savings Account

  • Annual Percentage Yield (APY)

  • Minimum balance

  • Monthly fee

    No monthly maintenance fee

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D

  • Excessive transactions fee

    $10 per transaction

  • Overdraft fees

  • Offer checking account?

  • Offer ATM card?

    Yes, if have an Ally checking account

Terms apply.

Marcus by Goldman Sachs High Yield Online Savings

Information about the Marcus by Goldman Sachs High Yield Online Savings has been collected independently by CNBC and has not been reviewed or provided by the bank prior to publication. Goldman Sachs Bank USA is a Member FDIC.

  • Annual Percentage Yield (APY)

  • Minimum balance

    None to open; $1 to earn interest

  • Monthly fee

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D

  • Excessive transactions fee

  • Overdraft fees

  • Offer checking account?

  • Offer ATM card?

Terms apply.

2. Open up a Roth IRA to start growing tax-free money for retirement

It’s not always easy to save for retirement. In fact, I don’t remember my parents ever really speaking to me about preparing for retirement — in our culture it’s normal for parents to be supported by their adult children in their old age. But regardless of whether or not you plan to financially support your parents when they’re older, it’s important to make sure you have the money to support yourself in your golden years.

The cost of taking care of an aging parent will vary depending on their needs. But adult children spend an average of $70,000 out of pocket in order to care for parents until death, according to a report from the Urban Institute.

A Roth IRA is a powerful tool you can use when it comes to saving for retirement. The after-tax money you contribute gets invested and grows over time. And when you withdraw the money in retirement (after age 59 1/2), you won’t pay any taxes on it.

The sooner you open up your Roth IRA, the better. That’s because your money will have more time to compound. As an example, if you open your Roth IRA today, invest $100 and contribute just $3,000 each year (assuming an 8% annual return), in 30 years you’ll have $715,024. However, if you follow these same steps but only give your money 20 years to grow instead of 30 years, you’ll only end up with $137,752. That 10-year difference can wind up costing you over $500,000.

There are lots of Roth IRA providers out there, but I used Fidelity to open up my account and one for my parents in just 20 minutes (you’ll need your birth date, social security number, address and bank information for making transfers).

You can invest your money in a target date fund or choose your own investments. But if you want a hands-off approach, you might look into Betterment or Wealthfront, since their robo-advisors can pick the portfolio that’s right for you and automatically adjust your allocation based on your needs and risk tolerance.

Fidelity Investments IRA

Information about Fidelity Investments IRA has been collected independently by Select and has not been reviewed or provided by Fidelity Investments prior to publication.

  • Minimum deposit

  • Fees

    $0 commission fees for stock and ETF trades; $0 transaction fees for over 3,400 mutual funds; $0.65 per options contract

  • Bonus

    500 free trades

  • Investment options

    Stocks, bonds, mutual funds, CDs and ETFs

  • Educational resources

    Tools and calculators that show users their retirement goal progress; Fidelity Five Money Musts online game to teach you about managing money in the real world

Terms apply.

Betterment

On Betterment’s secure site

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For Betterment Digital Investing, $0 minimum balance; Premium Investing requires a $100,000 minimum balance

  • Fees

    Fees may vary depending on the investment vehicle selected. For Betterment Digital Investing, 0.25% of your fund balance as an annual account fee; Premium Investing has a 0.40% annual fee

  • Bonus

    Up to one year of free management service with a qualifying deposit within 45 days of signup. Valid only for new individual investment accounts with Betterment LLC

  • Investment vehicles

  • Investment options

    Stocks, bonds, ETFs and cash

  • Educational resources

    Betterment RetireGuide™ helps users plan for retirement

Terms apply.

3. Pay attention to your employer’s 401(k) plan terms

Unlike a Roth IRA, a 401(k) is a retirement account provided through your employer that uses pre-tax money to help you save for retirement. And unlike a Roth IRA, you will pay taxes on any funds you withdraw from your 401(k) in retirement.

But what makes it a great wealth-building tool is that it uses the power of automatic savings, and your contributions can potentially be matched by your employer so you can grow your savings even faster.

However, it should be said that it’s important to make sure you understand the terms of your 401(k) plan — often even before you accept a job offer. Not all employers offer a match, which means you can end up with a lower balance than you would have had if an employer did offer a match.

You should also make sure you know how much you need to contribute in order to qualify for the match, otherwise you could be leaving extra money on the table. Finally, make sure an employer’s 401k plan has a wide variety of investment choices and low fees.

4. Invest in index funds

Investing your money is arguably even more important than saving it. That’s because keeping all your money in a savings account can cause you to miss out on much bigger returns from the stock market.

There is always some risk when it comes to investing; many people tend to shy away from it because they’re afraid of picking the wrong stocks. However, index funds can help you get some skin in the game without forcing you to pick individual stocks.

An index fund is a basket of stocks and/or bonds that’s designed to track a particular index, like the S&P 500. According to Investopedia, the S&P 500 has historically returned an average of 10% to 11% annually, so you might expect a fund tracking this index to produce similar returns.

Now let’s do the math. If you open up a brokerage account, put in an initial investment of $100 and then invest just $300 per month in an index fund returning 10% per year, you’ll wind up with $399,256 in just 25 years after contributing just about $90,000.

So even if you don’t want to deal with picking stocks, you can still invest your money through index funds to make sure you’re growing your net worth, beating inflation and building wealth.

Bottom line

Building wealth can be extra hard when your family must navigate a new financial system and you have to mostly teach yourself how to thrive. But taking small steps today can make a huge difference in the long-run. Setting yourself up to handle emergencies without taking on more debt, investing your money and being more retirement savvy can help you improve your financial position and build long-term wealth.

It can also help to share these strategies with your family members so they can be on their way to strengthening their finances, too. Just keep in mind that accumulating wealth won’t happen overnight; but as long as you stay on track, you’ll set yourself up for bright financial future.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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