5 Tips For Starting Financial Freedom In Your 20s
As I’m approaching my 30th birthday, I’m looking back and realizing how important focusing on financial freedom in my 20s was. Your 20s are filled with so many life changes and we start to really boost our income during this stage of life. For many of us, this is the time that we step out into the real world and get out of our school bubble. This is also the time that most people start to increase their income and start to establish their financial habits. Below are 5 tips for starting financial freedom in your 20s.
1) Stay clear of debt
Debt is constantly working against you and should be avoided as best as possible. This can be hard to avoid in your 20s, especially when coming out of college.
When entering the workforce, you might have racked up some student loan debt like I did. I came out of school with about $13,000 in total student loans and worked hard to pay those off within the first year of working. I really dislike the concept of student loans. It’s one of the worst kinds of debts because of these reasons:
- Not backed by an asset, but only by a future promise (the student will earn more in the future and be able to pay this back eventually)
- Can’t ever get rid of them through bankruptcy
- Preys on young adults who don’t fully understand the concept of the time value of money
- They’re driving up the cost of tuition
When I was in college, I would look at the starting salaries of jobs and think “if I’ll be making $50,000 a year, I’ll be able to pay off this $50,000 student loan in just a year.” Yeah, that wasn’t the smartest line of thinking I’ve ever had. Once you finally obtain that degree, you realize just how many expenses are waiting for you once you’re completely on your own.
Auto loans are another huge problem in your 20s. We think we need to buy a brand new $30,000 car coming out of college. You don’t. You can get back on a much cheaper car. Actually, I would suggest not having an auto loan at all and just buy an older car with low miles. The richest investor in the world, Warren Buffet, still only drives a $36,000 car. He’s worth over $60 billion dollars. So, if the richest investor in the world doesn’t see the value in buying expenses cars, why are we so focused on driving the latest new shiny vehicle?
Lastly, credit card debt. Credit card debt is one of the worst kinds of debt to hold on to. It’s extremely expensive with “normal” interest rates around 20%. In our family, we aim to only use credit cards for bills and pay it off each month to earn extra points.
If you find yourself needing to put expenses on a credit card when emergencies pop up, you need to start an emergency fund. This is a savings account with 3-6 months’ worth of expenses in cash just in case your car has problems, or you lose your job, or whatever happens. It’s an absolute blessing when you need the cash, and will be much cheaper than funding those problems that pop up with a credit card.
A study from NerdWallet.com in 2016 showed the average debt of an American just from all three of these categories (credit cards, auto loans and student loans) was $97,048. That’s a lot of debt that’s constantly working against you.
2) Invest in retirement accounts
Investing in retirement accounts is one of the easiest ways to get started building wealth. Retirement accounts are very powerful because you can contribute to them tax-free. Some of the retirement vehicles out there include:
- Individual Retirement Accounts (IRAs)
- Health Savings Accounts (HSAs)
- Thrift Savings Plans (TSPs)
If you maxed out your 401k each year starting from when you were 22, you would have $1.5 million assuming only 7% growth.
— Judelson, Giordano & (@jgs_cpa) September 25, 2017
3) Live below your means
In today’s society, there is so much marketing out there trying to get you to buy the latest iPhone, a new car, or whatever. You don’t really need these things. And in fact, they’re making you poor. Keeping lifestyle inflation in check is imperative for financial success. You have to spend less than you make to ever achieve financial freedom.
If you earn $250,000 a year, but spend $250,000, then you’re not building wealth. You might have a lot of nice things, but have gained very little on your balance sheet. This is important to remember in your 20s, because your income will likely grow quite a bit during this time. I’ve seen this in action in my own life. I remember being able to live off $600 a month back in college, and now I feel like I struggle saving consistently with making over $6,000 a month. If you can establish living below your means in your 20s, it will give you lots of capital to purchase assets throughout your lifetime.
— Goal Investor (@goal_investor) September 21, 2016
4) Buy assets, not liabilities
To put it simply, an asset is anything that puts money in your pocket, and a liability is something that takes money out of your pocket. If you’re focused on buying assets in your 20s, they will continue to provide income and grow for the rest of your lives.
Some examples of assets are:
- Real estate
Some examples of liabilities include:
- Smart phones
- The latest technology
- And anything else that doesn’t put more money back in to your pocket
Purchasing assets in your 20s can become even more powerful than buying them at any other adult stage in your life. Why? Because of time. With time on your side, you can really see the benefits of compound interest take place over your lifetime. Albert Einstein called compound interest “The most powerful force in the universe”, and I can certainly see why it’s true.
Below is an example of how powerful compound interest can be over time. If you purchased $100 in a stock that earned 5% per year and reinvested all the dividends, in 200 years that $100 would be worth over $1.6 million. Obviously, no one will live until 200, but this just illustrates how incredibly powerful compound interest can be over time.
The earlier you get the ball rolling, the more of an effect it will have during your lifetime.
— Ross Cameron (@DayTradeWarrior) September 18, 2017
5) Work on increasing your income
This is a suggestion I don’t hear echoed much when giving financial tips, but it’s one that should really be mentioned. For many careers, learning and improving your skill set will increase your income over time. I work as a software developer, and in the software industry, the stronger of a developer you are, the more opportunities and the higher of a paycheck you can earn.
Each industry is different so some of these might not apply, but here are some ways you might be able to improve on your skill set and increase your income over time:
- Read books and study your trade
- Gain certifications
- Seek mentors
- Listen to podcasts from other experts within the industry
- Go to conferences
- Look for opportunities to teach others which will increase your knowledge and understanding
— Bethany Lamb (@Bethanyrl) September 18, 2017
Striving for financial freedom in our 20s has set us up for long term success. We’ve seen our net worth grow from less than $0 to over $300,000 during our 20s due to establishing solid financial habits. I heard a quote one time that said, “What you focus on, expands” and if you continue to focus on these areas in your 20s, your finances will ultimately grow into a tool that can be used to enjoy financial freedom later in life.
Let me know what you think about these 5 tips to starting financial freedom in your 20s. Are there any essential tips that you would like to add?