• American Financial Partner

5 Key Steps for Building Wealth in Your 20s

Updated: Sep 21, 2021

When you are in your 20s, building wealth may not be a top priority. Right now you're focused on getting your career started, trying out to new restaurants/bars, and having some fun while you're young. However, if you are truly interested in building wealth, there is no better time to start than your twenties.

That's because when it comes to building wealth, your best friend is time. The more time you have to accumulate savings and invest your money, the more time your funds will have a chance to compound and grow.

Sure, most of the time it seems like everyone around you focuses more on spending money and accumulating stuff than building wealth. IGNORE THEM! Your path is your own. In this article, will look at the five key steps to building wealth in your 20s. Once you create a strong foundation, there will be nothing to stop you from building the wealth you deserve.

1. Learn About Personal Finance

The fact is, when it comes to personal finance, many people are illiterate. That isn’t their fault–our education system doesn’t focus on financial education, and many parents don’t have the ability or knowledge to help.

Your first responsibility, when it comes to your money and building wealth in your twenties, is to learn all about personal finance. If you become financially literate, you will be able to make good decisions for the rest of your life.

There are plenty of free or inexpensive resources to teach you all about money on the internet–you can read blogs, newspaper and magazine articles, listen to podcasts and watch videos from reputable sources. I also encourage you to read as many good books on personal finance as possible.

Financial education is an investment in yourself that can never be taken away. The sooner you get started learning, the better.

2. Don't Squander College

It’s hard to resist the urge to party hard in college. However, when it comes to building wealth in your 20s make sure you take your education seriously as well.

One of the most important decisions you can make in college is your college major, because that will partially determine your future career path. Of course, some majors are better for building wealth than others.

I’m not telling you to avoid studying what your true passion is in college. However, I do suggest that you double major, or only minor, in your passion subject. Focus on majors that are high paying and will always be in demand, aka STEM majors (Science, Technology, Engineering, Mathematics). This way, you still have a degree in a field that can help you earn the big bucks later.

3. Maximize Your Income to Build Wealth

The first job of your career can have a profound effect on building wealth in your 20s and beyond. On average, earnings growth tends to stagnate after the first 10 years into your career.

Your first job should be one where you can learn valuable skills. You are essentially investing in your future, so your employer should allow to invest in that future. Always look for opportunities to learn the specific skills you need to advance in your career. If possible, find a mentor–someone who has been on the job longer and has more experience to guide you in your career path.

Don't make the mistake of settling for a lower paying job that may appear to more closely "align" with your personal values. You may find it is a terrible place to work, and you make far less money. If you don’t love your first job, that’s OK. You can always get another one after a year or two. However, the starting salary at your first job is going to affect your future earnings at every job later.

And more importantly, when you are being hired for your first job, negotiate as much as you can. Of course, with little real-world experience, you will not have a lot of bargaining power, but you can do the best you can to increase your earnings right from the start.

4. Live Below Your Means

Maybe you got a flashy, high-paying job right out of college. If so, good for you! However, there is a danger to this–it may encourage you to live well above your means.

The single most important way you can start building wealth in your twenties is by making sure you are saving and investing money. Nearly 80% of Americans live paycheck to paycheck.

Don’t choose this path! One way you can avoid doing this is by sticking to the 50-20-30 rule. The 50-20-30 rule says you need to break down your spending as follows:

  • 50% of your net pay on needs like housing, utilities and essential groceries

  • 20% of your net pay on wants like entertainment, dining out or a fancy wardrobe

  • 30% of your net pay on savings and investing

By religiously adhering to the 50-20-30 rule, you will make sure that you are starting to stow away a good amount of money in your twenties. This will help you build an emergency fund, pay down any debt, and start investing as soon as possible.

We live in a consumer culture, and you will be tempted to spend way more than you really should. Ignore all of this nonsense and stick to your wealth-building plan!

5. Avoid Debt Whenever Possible

Debt is bad. Of course, some debt is considered “good debt,” like mortgages, but every dollar you borrow is money that you don’t have later and eats into your savings.

Credit card debt is the worst kind of debt! With average interest rates of 18.61%, this money will eat into your future wealth at an alarming rate.

Despite this, you should probably still have a credit card. That’s because credit cards help you establish a credit history. This is crucial for getting good rates on important things like mortgages and auto loans in the future.

It’s OK to put a little money on your credit card each month as long as you pay it off in full at the end of the month. That way you will be establishing your credit history without incurring interest charges.

If you do have debt, including student loans, make sure to start paying it off as quickly as possible. In general, you can use the snowball method by paying off your smallest balance first or just start with the loan with the highest interest rate to do so.

Taking Action

The good news is that building wealth in your 20s isn’t rocket science. You just need to commit to doing it, despite lots of temptations not to.

When you start building wealth in your 20s, the sky’s the limit on your future wealth. By getting a solid head start now, you will be ensuring a healthy financial future. You may even put yourself on the road to complete financial freedom.

Read Next: 5 Key Steps for Building Wealth in Your 30s

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