(Bloomberg) -- The key to success for young adults struggling to build wealth in the aftermath of the biggest economic downturn since the Great Depression may come down to a familiar bit of advice: Mind your elders.

The Federal Reserve Bank of St. Louis published a new report chronicling the link between age and net worth. Authors William Emmons and Bryan Noeth found that although young households are likely to have more education, they're not on track to acquire as much wealth as their elders.

One principle that could help younger people build nest eggs faster, Emmons and Noeth wrote, is to manage their balance sheets more like older people. Because young adults often face high financial hurdles, that can "be difficult, and it may be unpleasant, but if your goal is to accumulate more wealth, we know how to do that," Emmons said in an interview. Here are some pointers they give to help:


The average young family (where the head of the household is less than 40 years old) had just $14,021 in safe and liquid assets, according to Emmons and Noeth. Those include checking and saving accounts, certificates of deposits and bonds — money that can be used quickly or inexpensively.

That compares to liquid assets of $82,766 held among older families (headed by someone who's at least 62 year old) and $46,324 for middle-aged families (led by someone between 40 and 61 years old), the researchers found.

Setting up and maintaining a quickly accessible rainy-day fund helps young adults mitigate financial shocks, such as losing a job, unexpected hospital trips or car repairs. During times where income and spending is volatile, emergency funds act as a kind of cushion for consumption.

About 47% of respondents to a separate Federal Reserve household survey, taken last October and November, wouldn't be able to cover an emergency $400 expense without selling something or borrowing money, the central bank said in a report in May.


Borrowing is expensive, and having lots of debt on a household balance sheet can exacerbate financial shocks, Emmons and Noeth wrote. When a shock affects the value of your assets, those liabilities can raise the risk of insolvency or default.

"Having a lot of debt automatically raises the risk that something bad could happen to you," Emmons said in the interview.Put extra money in high-return investments

Investing in high-yield assets, such as stocks or a small business, "can lead to greater wealth on average over time due to lower volatility for any given level of expected return," the researchers wrote.

High-return assets reduce the likelihood of financial distress and will provide greater yield than a portfolio of tangible assets, such as a house, car or other durable goods.


"If a young family is willing to delay the purchase of a home, with its attendant debt burden, until they could afford a house with a significant down payment and still have enough money to invest in stocks and other assets with potentially high returns, it’s likely they would enjoy greater wealth later,” Emmons said in the paper's accompanying press release.

That may be advice many young adults are heeding. The U.S. homeownership rate was 63.7% in the first quarter, the lowest level in more than two decades. For those under the age of 35, it was 34.6%, the lowest since at least 1994.


Not only do older households have more liquid assets, they also have a greater share of their money tied up in financial and business holdings that provide higher average returns compared to a portfolio of mostly tangible assets. The median older family also had little to no debt from the 1989 to 2013 period the report analyzed.

While there seems to be a correlation between better balance-sheet management and wealth, Emmons and Noeth caution they can't identify which comes first.

"We suspect there are elements of two-way causation, that is, stronger balance sheets probably do contribute to greater wealth accumulation, but it may also be the case that the passage of time — as described by the life cycle — makes it easier to diversify and pay off debt when greater wealth is available," they wrote.

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