Your 20s are by far and away the most formative years of your life. During these years, you’re going to school, meeting new people and eventually entering the workforce and beginning what you hope will be a very lucrative and fulfilling career. On top of that, during these years, you’re probably on the hunt for a life partner, will become a homeowner and perhaps even enter into the world of parenthood. Given that all of these major life events tend to happen in a short 10-year window, making the right decisions in your 20s is paramount to living the best life possible and while all the events I just talked about will impact your happiness and success, there is one aspect of your life that you must have under control during this time and it’s your finances. Not building a solid financial base in your 20s will have you struggling financially in your 30s and beyond and because I want to see you win I’m going to share with you the 5 best ways to build wealth in your 20s!
Number 1: Avoid high interest debt
Building wealth is like filling up a glass of water. Every time you make and save money, the glass fills up a bit more and the more you make and the better savings habits you have the sooner your glass will be full. And, what happens when the glass is full? You guessed it, you can retire. I don’t think there is a single young adult on the planet who doesn’t have the goal of filling up that glass as early as possible, especially when they enter the workforce and realize that the job they thought they’d love wasn’t quite what they had in mind.
Unfortunately though, in many people’s quest to fill up their glass, a crack in their glass appears and every day more and more drops exit the glass, slowing down their ability to fill up their cup. What does that crack symbolize? You guessed it, it’s high-interest debt.
Assuming high-interest debt is like stuffing your face at a buffet. You know that if you stuff your face, you’re going to be feeling sick for the rest of the day. However, you do it anyway because in the heat of the moment, you trick yourself into thinking it’s a good idea and that nothing bad will come of it. The same goes for racking up high-interest debt. You tell yourself that taking on a bit of debt isn’t going to hurt until you are making interest payments that could double as a mortgage payment on your first home. The insane part about high-interest debt is that as adults, we know that we should be avoiding it but we assume it anyway. Why is that? I have a couple ideas.
I think in our 20s, people get into high-interest debt like credit card or auto loan debt for two reasons. The first is that they feel compelled to keep up with those around them. Let’s face it, there will always be someone who’s got more money than you or nicer things than you have and when we are still figuring out who we are as a person in our 20s, we tend to still have a strong need to fit in. How do we do this? We buy what others have, even if it means going into financially crippling levels of debt.
The other reason I believe young adults get into high-interest debt is because they lack patience. 20-somethings these days don’t even know what the world was like before everything was instantized. They never knew dial-up internet or having to wait for a movie to come out on DVD. Instead, they’ve always received instant text messages and are used to getting their online orders in 24 hours or less. As such, when they want something, they want it now and this usually means buying things before they can’t afford them and dealing with the financial consequences as they come.
As such, in your 20s, you want to avoid allowing any cracks to appear in your glass. How do you do this? You avoid high-interest debts. I truly believe that with a proper budget and some financial discipline, avoiding high-interest debt is something anyone can do.
But, what if you’re already in debt? Fortunately, you can patch up that crack and you do this by eliminating the debt you have. To eradicate your debt as quickly as possible, here’s what I recommend you do. First, create a budget that allows you to save money every month based on your current income. Then, go out and acquire a part-time job or create a side hustle. Use your savings from your 9–5 job and every penny you earn from your side hustle and pay off your debt from the highest to the lowest interest rate until you are free of all your high-interest debt. When you do this, filling up your glass will be 10 times easier.
Number 2: Build up your credit
Earlier on, we talked about the fact that in your 20s, you will be experiencing some very important life events like getting your first job, buying your first house and the list goes on. Now, you may think you’re doing everything right in order to be ready for when these life events take place. You may be studying hard to get that high-paying job or saving diligently to buy your first home. However, little to your knowledge, you may be overlooking one aspect of your financial life that will affect nearly all the important life events you’ll face in your 20s. What is this one piece of your financial game plan you might be overlooking? It’s your credit.
Ask most 20-somethings and the only time they’ve heard the word credit is in the term credit card which many of them are abusing on a daily basis. If you ask me, credit is the most overlooked and underappreciated aspect of anyone’s financial health. Everyone is focused on finding the next up and coming stock or jumping to a job that will pay them a bit more money but few people take the time to consider how their credit will impact their lives and let me tell you your credit comes into play more often than you think.
Nowadays, your credit is relied upon as a key indicator of your merit as an individual. It’s not uncommon for employers to run a credit check on you before giving you an offer and landlords are certainly going to want to check your credit to ensure that you’re going to be able to pay rent in-full and on time. Finally, as a young adult, when you finally do reach the time where you want to buy your first home, again your credit will be a determining factor in the rates you’re able to access on your mortgage or if you’ll be approved for one at all. In short, your credit matters and is essential to building wealth in your 20s.
Now that you know just how crucial credit is, the next question we must answer is how do you build and improve your credit? To start, what I recommend is that you run a credit report on yourself to see where your credit score presently stands. To sidestep issues with employers, landlords and to get preferential rates when taking on a mortgage, you will want a credit score of at least 700 so this should be your credit target.
Once you know where your credit stands, there are a few steps you should be taking to maintain and improve your credit. The first is to get a handle on your bills. What I suggest is that you automate all your bill payments to ensure you never fall into a situation where you’re paying late. Also, ensure you pay in full so that you limit any situations where you may be carrying a balance.
Then, ensure you are maintaining a low utilization rate on your credit cards and other loans. This means that you are only using a small percentage of your total available credit. For example, if you have a $1,000 balance on a $10,000 credit card then you have a utilization rate of 10%. Aim to never go above 30% and you will never have an issue.
Finally, you are going to want to avoid having too many hard inquiries done on your credit. Hard inquiries take place when external parties are reviewing your credit to decide whether or not to lend you money, extend your credit or grant you more available credit. When these inquiries take place, they temporarily lower your credit score and which is why you want to avoid having them performed too often. If you can avoid credit-lowering situations and monitor your credit in your 20s, then trust me you will be in a much better financial position than most of the people around you!
Number 3: Live minimalistically
For most people, their 20s is the first time in their lives where they finally have money to their name. Unfortunately, this newly found financial success is often abused because as I said earlier, we are not exactly a generation of patient people and this leads to overspending, unnecessary debt and ultimately financial decline. To sidestep this and ensure your 20s are wealth building years, I recommend you adopt a financially minimalistic lifestyle.
What does it mean to live minimalistically? Let me explain. No, I’m not going to tell you to throw out all your clothes or only limit yourself to 20 total possessions. What I mean is that you want to set up a financial life where you can be happy with less. Learn to appreciate things like cooking dinners at home or going for walks over expensive dinners or costly nights out at the bar. I think when we are young, we believe we have to spend a lot of money to have fun but this isn’t true. In fact, there are so many inexpensive ways to keep yourself entertained that spending money for pleasure is no longer required. Therefore, if you want to get ahead financially in your 20s, detach from the world of materialism and you’ll soon notice that you’ll be building wealth much faster than everyone else around you.
Number 4: Invest early and often
Remember earlier how we talked about filling up your glass and the fact that when it’s full you’ll be financially free? Well, one way to fill up your glass sooner is to start investing as early as possible. Besides avoiding high-interest debt, starting to invest in your 20s is the most important financial action you will take during this incredibly formative time in your life. Why is that the case you may be wondering? Because most people’s primary driver of wealth, compound interest, is largely impacted by time which is why you have no time to waste if becoming wealthy is part of your life’s plan.
Let me share with you an example of just how impactful investing early can be in your quest to financial prosperity.
If you start investing $300 a month from ages 18–27 and receive a 10% return a year, you could stop investing at 27 and have almost $2 million when you retire at 65. This means that with just $28,800 of your own money invested and a few decades of patience, you can set yourself up to be a millionaire because of compound interest.
Now, here’s where people go wrong. In their 20s, they get distracted with studies, dating, gaming and the like so they push off their investing efforts until the end of this formative decade of their life. This is a huge mistake!
If you only start investing at 28 you’d have to invest $400 a month until you’re 65 or $175,000 of your own money to get the results as someone who started investing earlier. Therefore, whether you’re just about to enter your 20s or are just about to leave them, don’t sleep on the importance of investing if becoming wealthy is something you want to achieve!
Number 5: Understand income pathways
Understanding how people make money is probably the most important aspect of building wealth you must start developing in your 20s. You see, most young adults are led down the path of going to college, getting a job and riding out that job until retirement. Is that the right path for most people? Probably. However, is it the path that will give you the best chance of becoming rich? Definitely not.
What you need to realize sooner than later is that the current 9–5 world most people live in is not set up for you to win big financially. Your boss has no incentive to pay you anymore than they need to retain you and as such you will likely never earn as much as you need to from a 9–5 job to reach all of your lofty money goals. This is why as a young adult, if you have any large financial aspirations, you must learn and deploy the V&S model.
The V&S model stands for value and scale. Having something of value and distributing it to the masses is how 99% of people get rich. Think Tesla selling technologically superior cars to millions of people around the world or a musician who gets billions of streams every time they release a new song. Simply put, when you put value and scale together, you will be punching your ticket to your dream rich lifestyle!
As such, in your 20s, you want to start to develop a means of offering value to others. Perhaps that’s through learning about a subject few people understand or building a product that lots of people could benefit from. Once you have something of value to offer, you can start to seek out ways to scale. In the example of having a unique set of knowledge, you can share your information on YouTube and build a massive audience. Alternatively, with a product, you can set up an e-commerce store and sell your product to millions of online shoppers.
While there is nothing wrong with having a 9–5 job, the reality is that a job rarely gives you the ability to provide value at scale. This is why most people never generate large incomes that will allow them to expedite their path to riches. Fortunately, you now have the blueprint, that when followed, will have you achieving the wealth you desire decades sooner than those taking the traditional wealth path. Therefore, regardless of your age, learn and adopt the V&S model today and I promise, your dream rich lifestyle will be achieved sooner than you ever imagined!