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If you’re reading this article in your 20s, you’re lucky.
Many people don’t learn about personal finance until later in their lives because schools don’t teach about it. Schools train us to be good employees and don’t teach us about personal finance or how money works.
The majority of school curriculum requires us to learn about algebra, Shakespeare, and molecular bonds. But when was the last time they required us to take a personal finance class?
Today, I want to discuss with you how to build wealth in your 20s. If you’re in your 20s, you’re probably fresh out of school and off to an early start. That’s good because the earlier the better!
Grab a pen and some paper to take notes, this is going to be packed with great information on how to build wealth in your 20s.
1. Track Your Expenses
Before you start to build wealth in your 20s, you must have a clear picture of your expenses. Knowing what you spend money on every month is the first step you should take because you need to have a full understanding of where your money is going.
It doesn’t matter how much money you make, if you spend it all, you won’t have anything left. This is one of the pillars we teach at InvestaMind – spend less than you make because it’s what you keep that matters.
Let’s discuss how you can start tracking your expenses.
Check account statements
Your bank gives you a statement every month that summarizes all the transactions you made.
If you chose to receive it electronically, you should be able to access it by logging into your bank account website and going to “statements.” If you opted to receive it by mail, you should receive it at the end of every month in your physical mailbox.
This is one of the best ways to check what expenses you had every month. Whether it’s a statement for a credit card, checking account, or savings account, you can review all transactions and expenses. It is also good to make sure you check for any unauthorized transactions.
Use an Excel spreadsheet
After checking your account statements, you can then enter the transactions you made into an Excel spreadsheet. Dedicate each row to a specific date, and categorize all your transactions. Some categories you may consider using are:
- Rent/Mortgage
- Groceries
- Dining out
- Transportation/Car Maintenance
- Clothes
- Significant Other (money spent on wife/husband/boyfriend/girlfriend)
- Hobbies
- Houseware (toiletries, furniture, etc.)
- Subscriptions (Netflix, gym membership, etc.)
Use an app
Does creating an Excel spreadsheet sound like too much work? There are free apps you can use that track your expenses and automatically have them categorized for you. Apps like these would provide a more hands-off method and require less work on your behalf.
Two of the most popular apps are Mint and Personal Capital.
You can link your credit cards or checking accounts to these apps and they automatically track and categorize all the transactions that occurred. They even provide you with visuals such as graphs and charts that make it super easy to keep track of everything.
Whichever you choose, simply go through the instructions to create an account and link your other bank accounts to start tracking.
In my experience, the only con with these apps is occasionally they will put some of the transactions in the wrong category. If you want a more hands-on experience and categorize the transactions yourself, I suggest trying out other apps such as Money Lover. You can also give Google a quick search – there are a ton of free apps you can use.
Once you’ve chosen a method and got the full picture of your expenses, set some time aside to sit down and take a close look at your spending habits.
Do you spend a little more money than you should on eating out? What about any memberships or subscriptions you don’t use? Try to see if there are any unnecessary expenses you can cut out to save money. Make a budget and follow through.
2. Eliminate Debt
The second most crucial step to building wealth in your 20s is to stay away from debt as much as possible.
In 2021, a study found that the average American had a mortgage debt of $220,380, a student loan debt of $39,487, and a credit card debt of $5,221.
First off, if you’re already in debt, you won’t want to take on more debt unless you need to. For example, don’t buy an expensive car. Not only do you need to pay for the car, but you are going to have to pay for the insurance. The more expensive the car, the more expensive your insurance will be.
Organize and consolidate all the debts you have and list them in order with the highest interest rates on top. These are the debts you need to start paying off first.
Make paying off debt one of your top priorities. Pay more than the minimum payment if you can, it’ll help you get out of debt quicker by significantly reducing the amount you owe. Create a plan that you can follow.
Focus on the long-term goal. It may seem like you’re in too much debt, but stick with your plan and don’t give up. Remember, you need to eliminate debt to start accumulating wealth.
3. Contribute to Retirement Accounts
Once you get rid of all your debt, you can consider contributing to your retirement investment accounts. To build wealth in your 20s, you must start early because investing takes time. Start planning for retirement in your 20s so you don’t have to work until you’re old.
A retirement account is a type of account that has tax advantages. You can invest in assets such as stocks and bonds and reduce the total amount of taxes you owe.
Let’s take a look at a few retirement accounts you can open today.
401k Plan
A 401k is a retirement account provided by your employer.
After your account is open, you can have a portion of each paycheck deposited into this account before taxes are deducted. That means your deposits will grow tax-deferred.
Within that account, there will be several mutual funds you can invest in. Make sure you choose to invest in index funds to avoid getting hit with high management fees.
Most companies offer a match and will contribute to your 401k up to a certain amount. Make sure to take full advantage of this match. It’s free money that you’ll leave on the table if you don’t.
When you reach 59 and a half years old, you’ll be able to withdraw your money. Your money will be taxed as ordinary income tax.
For more information on your 401k, you need to get in touch with your company’s human resources. They will be able to help you open an account and set it up.
Roth IRA
The next retirement account you can open is a Roth IRA.
Unlike a 401k, you contribute after-tax money to a Roth IRA. After your paycheck has been deposited into your checking account, you can then have your brokerage withdraw the money. From there, you can choose what to invest in through your brokerage.
Not sure what to invest in your Roth IRA? We have an article just for that.
After you are 59 and a half years old, you can then start making withdrawals from your Roth IRA. The best thing is you don’t pay taxes on your withdrawals! The growth your investments experienced will be yours to keep.
There are so many other retirement accounts you can open – here’s a list of all of them. If you don’t already have an account, make sure you open one today. Don’t let Uncle Sam take more money than he should.
If you have a hard time allocating money from your checking to your Roth IRA, you can have your paycheck deposited into multiple accounts. Each employer is going to be different, but contact your human resources to see if your employer offers this function. That way, you don’t have to worry about overspending. A portion of your paycheck will automatically be deposited into your Roth IRA without you having to lift a finger.
4. Buy Assets, Not Liabilities
This is one of the most key concepts to remember on your path to building wealth in your 20s: buy assets, not liabilities.
Now that you have your retirement accounts set up, I want to briefly talk about assets and liabilities and why you should care about them. Let me first explain what they are.
Assets are tangible or intangible instruments that when purchased, increase in value or give you an additional stream of income. Examples include but are not limited to stocks, bonds, and real estate. Let’s take a company’s stock as an example. When you purchase a stock, you are purchasing partial ownership of the company. If the company continues to innovate and grow, its stock will also increase in value. Some stocks pay out dividends which is also another form of income you receive. Yes, your stock may decrease in value but that is the risk that any investment comes with.
Liabilities are objects that when purchased, decrease in value and cause you to lose money. Examples include cars, clothes, electronics, cell phones, purses, and debt (not all debt is bad, but I’ll save that topic for another post). A car immediately decreases in value the moment you purchase it and drive it off the car lot. New cell phones are released every year making older phones obsolete and valueless. The main thing to remember is that liabilities decrease in value and pull money out of your pocket.
Now, I’m not saying that you shouldn’t purchase liabilities at all. You might need a car to get to work or a phone to keep in contact with loved ones. But understand the concept and the differences between the two. Know that the more assets you purchase, the more wealth you will be able to build.
I have a whole article on assets and liabilities here!
5. Start A Business
Last but not least you can start a business to build wealth in your 20s. This is probably going to be the most challenging step we will discuss today. It is not required for building wealth, but worth a shot.
Starting a business in today’s society is so much easier compared to the pre-internet era. Before the internet existed, you needed to raise an enormous amount of capital to start a business. You would need a brick-and-mortar storefront, inventory, employees, and the list goes on.
However, with the internet, anyone can start an online business with very little capital upfront. For example, you can create and host a website for less than $5.00 a month. You can set up an online print-on-demand t-shirt store that doesn’t require any inventory. You can even start a YouTube Channel or write an e-book for completely free.
Already have a passion or hobby? Try monetizing it. In other words, find out how you can make money off of your passion or hobby. The possibilities are limitless.
Invest in your education. Learn a new skill. Before the internet, if you wanted to learn something new, you had to get up and go to the library. You would then have to spend hours searching for a good book. Now, you don’t even have to leave your bed. Do a search on your phone or your computer. There’s an infinite amount of educational content that can be accessed at the tip of your fingertips.
Starting a business is not an easy task nor a get-rich-quick scheme. It requires consistency, discipline, and constant innovation. However challenging it may be, it’s not impossible. Many people have successfully built wealth through their businesses. If they can do it, so can you.
Conclusion
There is no secret when it comes to building wealth. Start with the easy ones and work your way up to the more challenging ones. Anything worthwhile requires a lot of effort and discipline upfront. Start now and you will begin to reap the benefits of achieving financial freedom.
I hope this article was able to bring some value into your life.
If you have any questions, please feel free to reach us at our contact page!