Much like how the foundation of your home is what holds up the roof and walls, your financial foundation holds the walls and towers of your financial fortress together. From a financial perspective, the goal of your 20s is to build the skills and knowledge necessary to construct your fortress in your 30s and expand your financial kingdom in your 40s and 50s. Without this solid foundation, none of what you hope to accomplish financially will be possible.
Most of us go off into the corporate world after college, with comparatively fewer starting their own businesses. With that in mind, most of this article will focus on what you can do as a career employee, and not as a small business owner.
#1 Advice: Increase the Size of Your Paycheck
Much was discussed in the previous post about career foundations in your 20s, but this is so important that I will touch on it a bit here as well. The biggest payoff for an investment that you can make in your 20s is working hard and improving your career prospects. While a high income does not guarantee a high net worth, it sure helps. If you missed the previous post, I recommend you spend a little time reading it.
Common advice for 20-somethings is to work on side gigs and develop multiple sources of income. For most, this is poor advice and probably not worth it. Few side gigs are scalable or have the potential to make any sort of serious money. There are a tiny percentage of bloggers that make money doing it (this blog is not in that category – I write because I enjoy it). Uber and Mechanical Turk are not worth spending your time on. Instead, use this time to get better at your job. Work longer hours, since your 20s are the time to do it. Improve your skills and spend your evenings getting your MBA or a certification that improves your earnings potential. For example, I spent my evenings studying for the CFA exams and received my charter before I was 30. It’s been helpful to my career ever since.
Finally, stop trying to find those magical passive income streams. The only truly passive income stream comes from investments, and the only way for you to have any substantial investment income is to have a large pool of investment capital. Focus on your career and put that into overdrive.
Increase Your Financial Knowledge
Beyond improving your career, the second most important way to build your financial foundation is to increase your knowledge base of all things financial. Few of us learned good financial habits from our parents and even fewer learned them in school. However, learning about basic and advanced financial and investment topics is so impactful to your level of wealth that you must learn. Not many other topics will determine your level of wealth more so than learning about finances. The cost of financial ignorance is huge. Budgeting, insurance, investing, and managing cash flow are just a few subjects that need to be learned. Get over the fear and boredom and force yourself to do it.
Finding the right information is key and must be done carefully. There’s a lot of bad advice out there, and a lot of advice that enriches the giver over the receiver. Read as much as you can, but make sure you’re reading the good stuff: Fortune, Forbes, Wall Street Journal. Look for high quality blogs (e.g. White Coat Investor, Get Rich Slowly, Financial Samurai, Oblivious Investor, ESI Money). Always consider the source and figure out if they are in it to make a dollar off of you in some form. Find someone you look up to (financially) and ask them questions. Unless they are wealthy, don’t go to your parents or co-workers; find someone with actual (not flashy) wealth. Most people would be thrilled to help a younger person get the information needed to improve their finances.
There is a lot of information out there. Take one topic at a time and build up your knowledge base. Fight through the fear and boredom.
Life ultimately comes down to our habits. Set yourself up early with solid wealth-building habits that allow you to save a healthy chunk of your paycheck. Wealth-building habits will let you pay down debt in your 20s and start accumulating investment capital. They will let you advance in your career and secure a large paycheck down the road. Most importantly, they will put you on track for an above average life. On the other hand, following many of your peers will lead you to a life of mediocrity or worse. Many 20-somethings simply do not recognize where they are in their life. They see their parents and older coworkers with big homes, a nice car, and fancy vacations but do not recognize that these people have spent years working to get to that point. It’s okay to have low quality things when you’re 26; in fact, this helps set you up better later in life. Don’t rush to have all the things your parents have. Instead, rush to build up your personal wealth.
Build the processes into your life that let you save and invest and get off the paycheck to paycheck treadmill. The first step is to minimize fixed expenses for as long as you can. This means living in a cheaper apartment and driving a cheaper car than you can afford. For 20-somethings, those two expenses will be the largest ongoing expenses, beyond debt repayment. Figure out your budget and learn how to manage cash flow well. Simplify your finances now, as they only get more complicated. Secondly, spend wisely and question everything. Buy quality where it makes sense and where you can afford it. This includes clothing that is always fashionable (not that trendy stuff – go for the classic look), some furniture (such as a good mattress), and kitchen appliances that you use daily (get a great coffee maker and use it!). Question all recurring charges that you pay each month. Is your phone plan really worth paying $100/month, or can you use an alternative like Ting or Republic Wireless? Call your internet provider a few times a year to see what discounts you can find. Get rid of cable.
Wealthy habits also include habits outside of finances. Establishing healthy habits now, like eating smartly and being active, will be incredibly important for furthering your career and minimizing health issues down the road. Become well-rounded; don’t be the person with only stories about how much they drank last weekend. Spend time learning about topics outside your comfort zone and try new and interesting activities. Finally, as you get into a serious relationship, discuss finances with your partner. If you’re married, recognize that all money is family money and plan together. Get on the same page and learn about these topics together.
Master the Basics
By the time you reach your late 20s, you should have learned the basics of money management. If you haven’t, you will have a difficult time accumulating wealth. Some of the money basics include:
- Finding the answer: Managing cash flow, dealing with taxes, learning about different account types, and investing for the future are all incredibly complex topics. No one can know everything about each of those. The difference between those who master these and those who don’t is the ability to find the answer and the desire to do so. Given the amount of bad information available, knowing the right sources and having a skeptical viewpoint are both important. Be the person who’s not afraid to dig into the details.
- Pay down debt, eliminate monthly bills, and minimize fixed expenses: Higher cash flow allows you to build up investment dollars more quickly. Try to get rid of as many bills as possible. This means culling your monthly recurring charges and paying down debt. As discussed above, minimize your costs for housing and transportation, as these are likely to be your two biggest recurring expenses. Establish an account to save for those expenses that you know will inevitably come up. Car repairs, insurance premiums, and wedding gifts will all be expenses in your future; have the cash on hand to pay for them.
- Build up some cash reserves: Cash is king and cash flow is queen. Cash gives you options, and without it you are at the mercy of external events. Negative life events do not happen to poor people more often than rich people. It’s just that rich people have the cash on hand to deal with them and bounce back quickly, while poor people never do. Always live your life from a position of strength. Having cash in the bank gives you that.
- Start saving for the future: Whether it’s a new house, retirement, or F-You money, you will need a large pile of capital at some point in the future. Define your goals and don’t be afraid to use separate accounts and mental accounting to help you reach those goals. Recognize that the amount of money you think you’ll need is probably not enough, so shoot for more. Learn about investing and favor equity and equity-like investments over bonds. Now is the time to take risks, as you have your whole career ahead of you to recover if necessary.
- Learn about taxes: Your tax burden in your 20s may seem like a lot, but trust me, it’s tiny right now. However, learning about the tax code will help you minimize the cost going forward. There is no need to become a CPA, but doing your own taxes and reading the occasional tax-related article will put you ahead of others.
- Give back: Recognize all of the great things in your life and practice an attitude of gratefulness. Living in the developed world, having the chance to become educated, and having a job that pays the bills and allows you to save are all things to be grateful for. Develop the habit of giving back, as it will pay for itself tenfold in the future. Give your time, talent, or treasure.
- Have fun: Finally, don’t live like a hermit; get out there and have fun. Your 20s should be some of the best times in your life. You’re earning some income and probably have few responsibilities. No mortgage, no kids, and no sick parents to care for yet. Remember to develop good wealth-building habits and save money for the future, but don’t be afraid to take that trip to Mount Kilimanjaro or go see the Great Pyramids of Giza (paying for it with cash, of course).
Pour the Foundation
Your 20s are a time of great potential. Use it wisely to pour the foundation for your financial fortress. Find ways to increase the size of your paycheck and increase your knowledge base about all things financial. Build wealthy habits that allow you to save a good chunk of your paycheck. Master the basics that put you on the path to an above average life.
Keep building my friends.