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If you’re in your 20s and 30s, you probably think that this is an impossible time to save and invest. Perhaps you just graduated from college and have a mountain of student loan debt. Or maybe you’re trying to save for an engagement ring to propose to your high school sweetheart. Or maybe, despite your good paying job, you feel like you’ll just never be able to save or invest until your income goes up. Despite all of the reasons it may be difficult to build wealth at this point in your life, it is the easiest time in your life to set yourself up for long-term financial success because you have one major asset on your side: time.
Today, I want to share with you how to build wealth in your 20s & 30s. The tips I am going to share may feel challenging at first, but once you get the hang of them, I am confident that you can begin to set yourself on the path to financial success.
Step 1. Figure out Your Financial Priorities
When I graduated from school, I took a job in finance that paid well. While that job was in a location with a high cost of living, I figured my salary would be adequate to cover my expenses. However, I found that nearly every month, my expenses exceeded my income.
I would justify this to myself, saying that I was just out of school and that it would take time to build an income that could sufficiently cover my expenses. “When I make more” was my common refrain.
But after a couple of years of this cycle, I realized that simply wasn’t going to cut it. It wasn’t my income that was the problem. It was my expenses.
Over time, I learned that the secret was using my income to cover my financial priorities. I had the basic needs like everyone else (housing, food, etc.), but the problem was that I was spending on all the non-essential things I wanted to spend money on, rather than prioritizing which items were important to me. Over time, however, I learned how to direct my money towards my priorities.
Why Your Financial Priorities Matter
If you read and implement only one tip on how to build wealth in your 20s & 30s, make it this one. In your 20s, especially, you are just figuring out how to make your money work for you. Your money can’t do everything you want it to do, but it can do most things you want it to if you prioritize your spending.
For me, at the moment, my financial priorities revolve around buying assets – things like real estate and stocks – to produce additional streams of income.
So, determine your financial priorities, and then get prepared to direct your money towards these goals.
Step 2. Budget Your Financial Priorities
Once you know what your financial priorities are, it’s time to take action. There is one, and only one way that I know for sure will help you to stay on track with these priorities, and that’s budgeting.
I say it over and over because it is so important.
When you budget, you can consciously direct your money towards the things that are important to you. For tips on getting started, learn How to Budget, and check out our favorite budgeting app, You Need a Budget.
The goal of building your budget is to create a gap between your income and your expenses. In other words, you’re trying to adapt your spending to live below your means.
Step 3. Pay Your Bills On-Time
Next, it sounds easy, but you must pay your bills on-time every time. If you don’t, it is incredibly easy to fall behind and start racking up debt.
If you’re budgeting and align your spending with your budget, you should never have to worry about paying your bills on time.
I’m here to let you in on a secret. I don’t manually pay my bills. The secret is that I automate my finances so that I never have to worry about paying a bill after its due date (more on that in a minute).
So many parts of your financial life revolve around paying your bills on time. Your credit, your debt, your financial stress. So, just pay them on time, and carry on with your life.
Step 4. Build Your Emergency Fund
Next, I want to talk about some specific financial priorities that should be on your mind if you’re serious about learning how to build wealth in your 20s and 30s.
First, I want you to start by building an emergency fund. An emergency fund is not optional – too many things in life are unpredictable not to have a cushion to fall back on. A change in your job status, health, or accident could be the difference between paying your bills and racking up credit card debt.
How Big of An Emergency Fund Do You Need?
Some people suggest as little as a three-month emergency fund (i.e., three months of expenses) is adequate. I am here to tell you this isn’t enough. If you lost your job during a recession, do you believe you’d be able to find a new one in 90 days? I certainly don’t feel comfortable with that assumption, and I am not sure you should either.
Instead, aim to build up a six-month emergency fund (minimum). I realize that is a massive amount of money, but let’s think about how long it might take to build that up.
Let’s say, for example, that you have no emergency fund now, and you can dedicate 15% of your post-tax income to an emergency fund. Conceptually, this means it would take around six months to build every one month of emergency fund coverage. In total, this means it would take approximately 3.5 years to build a robust emergency fund.
One food for thought is that your emergency fund only needs to cover expenses that you’d have during an actual emergency. For example, if you lost your job, you could probably cut back on some fun spending, cut back on contributions to your investments, etc. while you are out of work.
Finally, I want you to focus on building your emergency fund before investing or paying down (most types of) debt. If you have high-interest rate credit card debt, you can think about paying that down before building your emergency fund, but certainly don’t pay down inexpensive debt (like a mortgage or student loans) before you have an adequate emergency fund. If you fall on hard times, it doesn’t matter how little debt you have or how much money is in your 401(k). You need cash, and you need it quickly. That’s why I think you should prioritize your emergency fund over these other priorities.
The best way to store your emergency fund is to open a high-yield savings account to stash your money. Commit yourself not to touch this money unless a real emergency happens. By the way, I have a relatively strict definition of an emergency. Job loss. Medical emergency. Family emergency. Things like car and home repairs aren’t emergencies – they are items for which you should be budgeting.
The reason I recommend a high-yield savings account is because you want to maintain the real value of your emergency fund. In other words, you don’t want inflation to erode your emergency fund. And, despite low interest rates, savings accounts are still worth it.
One of my favorite high-yield savings accounts is at CIT Bank. While they do offer a regular high-yield savings account, I prefer their money market account, which functions like a savings account but provides more interest.
Finally, if you’re looking for a unique strategy to store your emergency fund, Series I bonds are backed by Uncle Sam, and I use them for part (not all of my emergency fund). They track the rate of inflation, so you never have to worry about the value of your emergency fund eroding because of inflation.
Step 5. Pay Down Debt (Maybe)
My next tip for how to build wealth in your 20s & 30s is to pay down debt. But maybe not all debt.
Look, I know Dave Ramsey and others say you should aggressively pay down every penny of debt that you have, but that is terrible advice.
Good Debt vs. Bad Debt
There are two kinds of debt: good debt and bad debt. My definition is pretty simple. If the interest rate on your debt is less than you could earn from investing, it is good debt. If the interest rate is more than you could make from investing, it’s bad debt. There are a handful of exceptions, but this is generally a good rule to follow.
Let’s look at some examples:
- Mortgage @ 3.5% interest = GOOD Debt
- Student Loan at 5.0% interest = GOOD Debt
- Personal Loan at 5.0% interest = BAD Debt (because there’s simply no good reason to need this type of loan if you’re managing your financial priorities)
- Credit Card Debt at 18% interest = BAD Debt (because you’ll never earn 18% interest by investing)
Naturally, you should make at least the minimum payment on ALL your debt. But when deciding to prepay debt, determine if it’s good debt or bad debt.
Let’s use an example of your mortgage. You have a mortgage with a 3.5% interest rate. You could prepay your mortgage, or you could invest at 7.0% (the average long-term return of the stock market). In this case, if, and only if, you can commit to investing the difference, you’re better off investing instead of prepaying. Of course, if you’re not disciplined enough to invest the difference, by all means, please prepay the debt.
Student Loan Debt
If you’re like millions of other 20 and 30-year-olds, you may have a mountain of student loan debt. While I realize the temptation to pay this down, consider the interest rate.
While it isn’t an exact science, use 7% as a rule of thumb for what you could earn investing. If your student loan debt is, say, 6%, first I’d rather you consider refinancing before you try to pay it down. You could lower your payment while saving on interest costs.
However, refinancing doesn’t always make sense. If it doesn’t, and the spread between what you could earn by investing and what you could “earn” by paying down your debt is marginal, there are psychological benefits to paying down your debt. For one, once you are debt-free, your monthly cash flow will increase significantly. And, you may feel better knowing your total debt is lower. Lastly, paying down your debt has a guaranteed return on investment (the amount of interest saved).
Bear in mind, though, if the spread is significant between the rate of return from investing and the interest rate on your debt, the only person you’re shortchanging by paying down debt is yourself.
Why? Because your 20s are THE most crucial time in your life to invest.
If you’re looking for some detailed guidance, check out this ASF guide on paying off student loans.
Step 6. Use Your 401(k) and Other Retirement Vehicles
When you’re in your 20s and 30s, you have the highest amount of opportunity to position yourself to retire someday. Over the long-term, one strategy that has proven itself over and over is time in the market. In other words, if you invest your money for a long time, you stand to earn returns (assuming your investments are sound).
In your 20s and 30s, you have at your disposal three to four decades for your money to grow. The longer you wait to start investing, the harder it will be to reach your long-term financial goals.
So, by starting early, you are giving yourself the maximum amount of time possible to build wealth. While it may seem a long way off, this means an earlier retirement, financial independence, and freeing up more of your life to do the things you want to do.
That’s all money is, right? It’s a vehicle to do what you want to do in life.
Leveraging Retirement Accounts
If you’re ready to start investing, leverage your retirement accounts. Why? They offer tax advantages that will allow you to grow significantly more wealth. For most people, this means using some combination of 401(k)s and IRAs. Here are a few other posts to get you started:
- How to Start Investing: A Beginner’s Guide
- How to Invest in Mutual Funds
- A Guide to Investing in Your 401(k): Are You Missing Out on Free Money?
- Roth vs. Traditional IRA: Which is Right for You?
- Roth vs. Traditional 401(k): Which is Right for Your Retirement Plan?
When you are young, you have lots of time to learn from mistakes, so don’t be afraid to take risks. Those very risks are what will position you for wealth over the long run.
Step 7. Build a Passive Income Stream
Next, if you want to build wealth in your 20s and 30s, use this time in your life to create passive income streams. How do you do that? By buying income-producing assets, of course!
There are countless types of passive income, but most of them require some sort of upfront investment. Of course, if you’re already investing in the stock market, you’re already making significant progress on this front. But if you have additional money to invest, buying streams of passive income can set you up for long-term success.
If you’re looking for more ideas, check out these seven passive income ideas to build wealth.
Step 8. Start a Side Hustle
The problem with passive income streams is that they usually require some sort of upfront investment. But, if you’re already investing aggressively, you may feel a bit tapped out. One way to address this is to start a side hustle.
A side hustle allows you to earn extra money outside of your regular employment. Side hustles can be as simple as delivering groceries through Instacart or as time-intensive as starting a blog.
Figure out how much time you can commit to a side hustle, and then find one that is a good fit based on your interests and income goals.
Here is one of the most comprehensive lists of side hustles on the web if you’re looking for inspiration.
Step 9. Negotiate Your Salary
Next, as you’ve learned, one key ingredient in learning how to build wealth in your 20s and 30s is to increase your income. While buying income-producing assets or starting side hustles are a great way to achieve this, another worth considering is negotiating your salary.
While many people feel they have no leverage to negotiate, especially right out of college, trust me, you do. There is a great book called Negotiating Your Salary: How to Make $1,000 a Minute that gives step-by-step guidance on this process.
When I graduated from college, and I received my initial job offer, I successfully negotiated a starting salary that was a full $7,500 higher than the initial offer. After-tax, this worked out to over $400 more of net income per month. And every year, when I get a raise, it works off the higher base number that I negotiated years ago.
While it can be nerve-racking, this is one of the best things you can do to boost your income.
Step 10. Use Raises & Cash Windfalls Wisely
Phew! We’ve gotten through the big stuff like investing, saving, and budgeting. But there are so many more little things you should learn if you want to know how to build wealth in your 20s and 30s.
The first is what you should do with a raise or cash windfall. Let’s assume for a moment that you’ve just graduated from college. You’ve just received a job offer which comes with a $10,000 signing bonus! Wow!
But now you’re faced with a decision. How are you going to spend that money? Many people may rush out and use that money as a down payment on a fancy new car or furniture for their sweet new apartment.
While there are lots of good reasons to spend this money (and lots of bad ones, like a brand-new car), imagine if you invested this money instead. Let’s assume that of this $10,000, you receive $7,000 net after taxes. You invest this $7,000 and earn 7% for the next 40 years. This $7,000 would grow into over $104,000.
My point is this: use raises and cash windfalls responsibly. When you receive a raise, don’t use it to get a nicer apartment. Use it to increase your investments. If you receive a cash windfall through a bonus, inheritance, etc., use it to develop your financial future, not to solve for an immediate want. Check out my post on financial windfalls to learn the best money moves you can make!
Step 11. Automate Your Finances
One of the secrets to using raises and cash windfalls wisely is to automate your finances. Along the journey of learning how to build wealth in your 20s and 30s, there are so many distractions looking to derail you from reaching your goals. Forced savings and investments are perhaps the best way to keep your finances on track.
It can help you avoid lifestyle creep (whereby your spending grows with your income).
Automating your finances includes automating your savings, automatically moving money to your investments regularly, boosting your savings when you get a raise, and so much more!
Learn how to automate your finances to simplify your finances and build wealth.
Step 12. Properly Secure Your Fortress
Next, in your 20s and 30s, it’s time to think about how you are going to keep your wealth secure for the long-haul. Yes, I am talking about two unpleasant topics: insurance and estate planning.
Health Insurance. You need it.
Car insurance (with adequate liability protections). You need it.
Disability insurance. You probably should have it.
Health insurance and car insurance are the obvious ones. They protect you from accidents you think could eventually happen. Many people, however, don’t think about disability insurance. But if for some reason, you get sick and find yourself unable to work for some time (or incur some other accident), disability insurance can help ensure you continue to earn an income while you’re away from work.
One type of insurance I didn’t touch on is life insurance. If you don’t have anyone dependent on you and your income, you don’t need life insurance. But, if you have a spouse, kids, or other dependents, it’s time to think about how to take care of them if something happens to you.
This leads me to estate planning. I am by no means an estate planning expert, so this is an area where you’ll want to consult with a lawyer. Simply put, you’re looking to devise a strategy to transfer your wealth to those you care about if something happens to you.
If you don’t have many assets, this isn’t too important, but as you get into your 30s and start building assets, an estate plan is something you’ll want to create.
Step 13. Build Your Credit
Next, when you’re young, you’ll likely want to use your credit to buy a house, open a credit card, or use financing for a car purchase. Using credit wisely can help you along your journey to learning how to build wealth in your 20s and 30s.
The most important element of building your credit is to pay your bills on time, every time. But there is so much more to learn how to build your credit, like keeping your credit utilization ratio low, having a variety of credit accounts, etc.
Check out these ideas on how to improve your credit score, so you can set your credit on the right path from early in life.
Step 14. Consider Your Housing Situation
Next, in your 20s and 30s, you may want to start considering whether you should buy a house. While buying a home isn’t right for everybody, it is worth considering.
I’ve put together a guide just for you on renting vs. buying that can help you make this seemingly difficult decision easy.
Buying a house is both a financial and emotional decision, so it’s worth thinking through all the pros and cons in advance.
Step 15. Track Your Progress
You are well on your way to learning how to build wealth in your 20s and 30s. With all that you’ve done so far, you’re almost there!
One more tip to give you a boost of inspiration is to track your progress. Because let me tell you, there is nothing more motivating than watching your money work for you. You start to see your savings grow, your net worth increase, and you have more income to do the things you want to do.
Fundrise is my favorite tool for getting started with real estate investing. It allows you to invest in a diversified portfolio of commercial real estate at low costs and with a great deal of transparency. Check out my full review to see if this tool is right for you!
Step 16. Keep Learning!
Next, learning about personal finance isn’t a one-time effort. It requires continuing to learn so that you can explore new ideas to work towards your goals.
While there are many ways to learn about personal finance, the two that I use are books and podcasts.
You can check out seven of my favorite financial freedom books if you’re looking to find a book to get started. On the podcast front, while there are many to choose from, two of my favorites are the Bigger Pockets Money Podcast and the Bigger Pockets Real Estate Podcast.
Step 17. Don’t Forget to Have a Little Fun Along the Way
Finally, remember, you’ll only be in your 20s and 30s once! That means recognizing that money is nothing more than a way to be able to do the things you want to do.
The pursuit of money for the sake of money is a wasted endeavor. The pursuit of money to have financial independence and more choice to do the things you want to do in life is a worthwhile effort.
So, get out there and enjoy life, even if that means being imperfect when it comes to your finances!
How to Build Wealth in Your 20s & 30s in 17 Steps
Recapping how to build wealth in your 20s and 30s, here are 17 ideas to get you started.
1. Figure out Your Financial Priorities
2. Budget Your Financial Priorities
3. Pay Your Bills On-Time
4. Build Your Emergency Fund
5. Pay Down Debt (Maybe)
6. Use Your 401(k) and Other Retirement Vehicles
7. Build a Passive Income Stream
8. Start a Side Hustle
9. Negotiate Your Salary
10. Use Raises & Cash Windfalls Wisely
11. Automate Your Finances
12. Properly Secure Your Fortress
13. Build Your Credit
14. Consider Your Housing Situation
15. Track Your Progress
16. Keep Learning!
17. Don’t Forget to Have a Little Fun Along the Way
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