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6 Step Guide for How To Build Wealth in Your 20s

6 Step Guide for How To Build Wealth in Your 20s

Welcome to your 20s! A lot is about to happen in your life as you venture off on your own. You’ll start on a career path, find an apartment or a house, and be out in the world socializing! 

A lot of the time, you’ll be focused on the fun and exciting times associated with your age group. Hold onto it if the thought crosses your mind of building your wealth. It is not just a mere goal to add to your list. It’s possible to achieve, but you need to put in the effort and grow accustomed to smart money habits. Don’t get discouraged. 

Get ready to prepare your future self with the riches you’ve dreamed of by following this guide.

#1 | Create a Budget and Stick to It

You work hard for your money, putting in countless hours each week. In your downtime, it’s tempting to spend it on things that you want. But ask yourself, just because you want something, do you need it? 

A budget is a phenomenal tool that can help guide you towards good spending habits. Good-bye nice to haves hello must-haves. The target of the budget should be to have excess income that you can turn around and save or invest. 

As you draw it out, keep this question in mind: “Is there a place that I can cut out or trim expenses?” How many subscriptions do you have? Do you use them all? Or how about trips to the coffee shop? Maybe it’d be better to purchase a coffee maker instead to satisfy your need without spending top dollar on your cup of joe? These are just a few things to think about while planning.

Budgets are not complicated. They are rather easy to build. The complicated part is sticking to it. It’s human nature, have money in one hand and spend it with the other. You’ll need to teach yourself self-control.

#2 | Pay Off Debt and Stop Accumulating New Debt

Borrowing money may be necessary for some circumstances, but when building wealth, you’ll want to avoid it as much as possible. Debt with high-interest rates is where you can truly fall into a negative position. This is why building your credit, monitoring it, and maintaining is important.

Debt comes in the form of a loan, a credit card, etc. It’s secured (backed by an asset) or unsecured. Regardless of the type, keep it low, manageable, or non-existent. Most debt uses the concept of compound interest, making the creditors richer through interest. 

Turn this around and put your money to work for you, not against you. Investments work the same. The only difference is that you reap the benefits, not the creditors.

#3 | Save for Unforeseen Events or Expenses

In most cases, you control where you spend your money. Unfortunately, there may be a situation that occurs and is unplanned for, requiring you to react. But how can you react if you don’t have the money to front the expense?

There are two references of funds to become familiar with:

  • Rainy Day Fund
  • Emergency Fund

Include these savings accounts within your budget. Seek out a savings account that yields a high-interest rate but is not difficult to liquidate should the funds be needed in an instant. 

A traditional savings account is just fine, too, if that is your preferred way to go.

Rainy Day Fund

Rainy days don’t last long, hence the association with the name of this fund. A rainy day fund is built small. It’s great to have if you need to replace your vehicle's tires, as an example, especially if you wouldn’t have had the money to cover it otherwise.

Emergency Fund

It is recommended to have three to six months' worth of your income set aside in an emergency fund. Why? Just look back to 2020 and the pandemic that the entire world experienced. 

No one plans to be out of work, but it does happen, and that’s where the emergency fund can rescue you or buy you time until you get your foot in the door at a new company and position.

#4 | Make Contributions to a Retirement Fund

Work for an employer? What type of benefits do they offer? There should be retirement funds offered. A common one is a 401(k) or a 403(b) if working for a non-profit organization. 

Employers may or may not offer to match your contributions to a 401(k). If they do, take advantage of it! Structure your budget so that you are contributing to the max. 

For example, if your employer matches 4%, then put in 4% to get the best bang for your buck.

In 2022, the max annual contribution to a 401(k) is $20,500. If you reach this cap, don’t think you have to stop here. Other retirement fund investment options are at your disposal, such as an individual retirement fund (IRA).

There are two types of IRAs: Traditional and Roth. Contribution limits are identical, $6,000 per year. The tax treatments are different. Traditional IRAs and 401(k) contributions use pre-tax dollars. 

This means that you don’t pay taxes until the time of withdrawal, whereas Roth IRAs are after-tax dollars. There is no right or wrong choice, so choose the option that works best with your budget and aligns with your financial goals.

#5 | Set a SMART Goal

Don’t walk into the investment lane without establishing a goal. It’s exciting to act spontaneously at times, but investing is not the best-case scenario.

How about using the strategy known as a SMART goal? It stands for:

  • Specific
  • Measurable
  • Achievable
  • Realistic
  • Timely

Work through each of the above components to set your short-term and long-term goals. Also, think about the level of risk you are willing to take while investing. 

This is important while building your portfolio. Being that you have time, you may consider riskier options. Or, you may settle for comfort and focus on building growth slowly over time through more risk-averse options. Remember, It’s your choice.

Once created, keep it close. It’s not set in stone, so as needed, update it. Use SMART Goals to keep you motivated during the process. And teach yourself patience overall. Wealth takes time; it doesn’t happen overnight. 

#6 | Don’t Wait, Invest Now

There you have it, the green light. Your budget is built, you are debt-free or close enough to it, and you’ve banked enough in your savings to fight off unplanned expenses. Now what? It’s time to earn passive income through investments.

Across investment vessels, it’s recommended to take 10 - 15% of your income to apply towards investments. To be victorious, think about diversifying your portfolio. Diversifying is important, allocating your money across different types of investments and even different types of industries. 

The purpose is to keep your portfolio in balance, hedge against inflation, or combat riskier investment choices. Continue to think about your goals during this stage when moving your money around.

Not sure what to invest in? No problem. Here are investment options that are both market-driven and alternatives to the market:

  • Stocks
  • Bonds
  • Mutual Funds
  • Exchange-Traded Funds (ETFs)
  • High Yield Savings Accounts
  • Commodities, such as gold, oil, and more
  • Real Estate, or Real Estate Investment Trusts (REITs)
  • Cryptocurrency

You can either act as your financial advisor or seek out one that is reliable with your best interests in mind. Brokerage companies are out there. Do your homework on them, looking for those that have low fees and commission rates. Check their minimum account balances and see if they provide you with educational tools and resources. 

The Bottom Line - Have Fun in Your 20s While Preparing for Financial Security

The secret ingredient to financial security is building your wealth early in life - the earlier, the better. Draw out your financial plan and watch your money grow. You’ll find comfort in this as your dreams are fulfilled, such as purchasing your first home, obtaining a higher education, traveling the world, etc., in the short term. 

Long-term goals should also be at the forefront of your mind. Retirement may seem far away, but the years always feel shorter as we get older. Invest your money in retirement savings plans and any other types of investments now and successfully reach those milestones in life without the added stress and anxiety of debt.

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How to Build Wealth at Any Age |

A Beginner's Guide to Investing in Your 20s | SoFi

How To Start Investing In Your 20s | Bankrate