How to Get Wealth in Your 20s: The Winning Formula

June 30, 2024

Want to secure your financial future and enjoy the life you’ve always dreamed of? The secret lies in starting early and making smart money moves to get wealth in your 20s.

In this article, I’ll reveal the winning formula for building wealth at a young age, covering essential strategies like:

Mastering money management
Investing for long-term growth
Maximizing your income potential
Cultivating wealth-building habits
Protecting your assets and planning for the future

With this formula, you’ll lay the foundation for a lifetime of financial success and freedom. Let’s dive in and discover how you can start building your wealth today!

Mastering Money Management Strategies in Your 20s

Create a budget to track income and expenses
Live below your means to prioritize saving and investing
Build an emergency fund to cover unexpected expenses

Create a budget and stick to it

Creating a budget is the foundation of effective money management. Start by tracking your income from all sources, including your salary, freelance work, or any side hustles. Next, list out all your expenses, including rent, utilities, groceries, transportation, and entertainment. This will give you a clear picture of your financial situation and help you identify areas where you can cut back or allocate more money towards your financial goals.

Once you have a good understanding of your income and expenses, set realistic financial goals for yourself. These goals could include paying off debt, saving for a down payment on a house, or investing for retirement. Allocate your money accordingly, ensuring that you’re putting enough towards your goals each month. Remember to review and adjust your budget regularly to ensure you stay on track and adapt to any changes in your financial situation.

Live below your means and avoid lifestyle inflation

One of the biggest obstacles to building wealth in your 20s is lifestyle inflation. As your income increases, it’s tempting to upgrade your lifestyle by spending more on things like a nicer apartment, a newer car, or expensive vacations. However, this can quickly eat into your ability to save and invest for the future.

To avoid lifestyle inflation, make a conscious effort to live below your means. This means resisting the temptation to spend more as your income grows and instead prioritizing saving and investing. Look for ways to cut expenses without sacrificing your quality of life, such as cooking meals at home instead of eating out, or opting for a more affordable apartment in a less trendy neighborhood.

Embracing frugality doesn’t mean depriving yourself of enjoyment. Instead, focus on finding fulfillment in experiences and relationships rather than material possessions. By living below your means, you’ll be able to allocate more money towards building long-term, generational wealth.

Build an emergency fund

An emergency fund is a crucial component of any sound financial plan. This fund should contain enough money to cover 3-6 months’ worth of living expenses, providing a safety net in case of unexpected events such as job loss, medical emergencies, or major car repairs.

To build your emergency fund, start by opening a separate savings account dedicated solely to this purpose. This will help you avoid the temptation to dip into the fund for non-emergency expenses. Set a goal to save a specific amount each month until you reach your target of 3-6 months’ worth of expenses.

Once you’ve built your emergency fund, it’s important to use it only for true emergencies. Resist the urge to tap into the fund for discretionary purchases or planned expenses. If you do need to use the fund, make it a priority to replenish it as soon as possible to ensure you’re always prepared for the unexpected.

Automate your savings

One of the most effective ways to build your emergency fund is to automate your savings. Set up automatic transfers from your checking account to your emergency fund savings account each month. This way, you’ll consistently save without having to think about it, and you’ll be less likely to spend the money on non-essential items.

For example, if you earn a typical salary of $50,000 per year, you might aim to save 10% of your income each month, which would be $417 per month.

Keep your emergency fund in a separate, accessible account

When choosing where to keep your emergency fund, look for a savings account that offers a competitive interest rate and easy access to your money. Online banks often provide higher interest rates than traditional brick-and-mortar banks, and they allow you to easily transfer funds when needed.

Avoid keeping your emergency fund in investment accounts or other less liquid assets, as you want to be able to access the money quickly in case of an emergency without incurring penalties or losses due to market fluctuations.

Investing for Long-Term Wealth in Your 20s

Start investing early to harness the power of compound interest
Diversify your portfolio to minimize risk and maximize returns
Educate yourself on investing strategies and seek professional advice

Investing in your 20s is crucial for building long-term wealth. By starting early, you can take advantage of the power of compound interest, which allows your money to grow exponentially over time. Even small contributions made consistently can add up to significant sums by the time you reach retirement age.

Educate yourself about investing

Before diving into the world of investing, it’s essential to educate yourself on the basics of investing. Understanding different asset classes, such as stocks, bonds, and real estate, and their associated risk levels will help you make informed decisions.

Learn from various resources

Read books on investing and personal finance, such as “A Random Walk Down Wall Street” by Burton G. Malkiel
Attend seminars or workshops conducted by financial experts
Follow reputable financial blogs and podcasts, like “The Dave Ramsey Show“
Seek advice from experienced investors or financial professionals

Start investing early and consistently

One of the most powerful ways to accumulate wealth is to start investing as early as possible. By beginning in your 20s, you have a long investment horizon, which allows you to weather short-term market fluctuations and benefit from long-term growth.

Take advantage of time

Invest a portion of your income regularly, even if it’s a small amount
Automate your investments to ensure consistency and discipline
Increase your contributions as your income grows over time

According to a study by Fidelity Investments, starting to invest at age 25 instead of 35 can result in nearly twice as much money by retirement age, assuming an annual return of 7% and a retirement age of 67.

Diversify your investment portfolio

Diversification is a key strategy for minimizing risk and maximizing returns. By spreading your investments across different asset classes and markets, you can reduce the impact of any single investment’s performance on your overall portfolio.

Spread your investments

Invest in a mix of stocks, bonds, and real estate
Consider investing in both domestic and international markets
Rebalance your portfolio periodically to maintain your desired asset allocation

A well-diversified portfolio can help you weather market volatility and achieve more consistent returns over the long term. According to a study by Vanguard, a diversified portfolio of 60% stocks and 40% bonds has historically provided an average annual return of 8.7% with less volatility than an all-stock portfolio.

Invest in index funds and ETFs

Index funds and exchange-traded funds (ETFs) are excellent investment vehicles for beginners. These funds provide instant diversification by tracking a broad market index, such as the S&P 500, and typically have lower fees than actively managed funds.

Benefits of index funds and ETFs

Low expense ratios, which can save you thousands of dollars over time
Easy to understand and manage, requiring minimal investment knowledge
Provide exposure to a wide range of companies and sectors

According to a study by S&P Dow Jones Indices, over a 15-year period ending in 2018, 92.2% of large-cap funds, 95.4% of mid-cap funds, and 93.2% of small-cap funds underperformed their respective benchmarks. This highlights the potential benefits of investing in index funds and ETFs that track these benchmarks.

Seek professional advice when needed

While it’s essential to educate yourself about investing, there may be times when seeking professional advice is beneficial. A financial advisor can help you create a personalized investment plan, navigate complex financial situations, and provide guidance during market volatility.

When to consider professional advice

When you have a significant amount of money to invest
When you’re facing a major life event, such as marriage, starting a family, or buying a home
When you’re unsure about how to allocate your investments or rebalance your portfolio

Building wealth is a long-term process that requires patience, discipline, and a willingness to learn. By starting early, investing consistently, diversifying your portfolio, and seeking professional advice when needed, you can set yourself on the path to financial success in your 20s and beyond.

Maximizing Your Income Potential

TL;DR:

Focus on career growth to increase earning potential
Start a side hustle or freelance work for extra income
Invest in education and personal development to stay relevant

Focus on your career growth

Focusing on your career growth is one of the most effective ways to maximize your income potential in your 20s. As Kevin O’Leary, investor and star of ABC’s “Shark Tank,” advises,

“The best investment you can make is in yourself. Investing in your education, your skills, and your network will pay dividends for the rest of your life”.

Continuously improving your skills and knowledge is essential to increasing your value in the job market. Seek out opportunities for training, workshops, and certifications that are relevant to your field. As you gain expertise, you become a more valuable asset to your employer, which can lead to promotions and higher compensation.

Seeking advancement opportunities

Don’t be afraid to ask for promotions or take on additional responsibilities at work. As Ramit Sethi, author of “I Will Teach You to Be Rich,” states,

“The biggest raises come from job hopping or getting a promotion. If you’re not getting a raise every 12-18 months, you’re not growing your career as fast as you could be”.

Start a side hustle or freelance work

Starting a side hustle or freelance work can be an excellent way to generate extra income in your 20s. Identify your unique skills and talents that can be monetized, such as writing, graphic design, or web development. Explore opportunities to offer your services on freelance platforms like Upwork, Fiverr, or Freelancer, or reach out to local businesses that may need your expertise.

As Chris Guillebeau, author of “Side Hustle: From Idea to Income in 27 Days,” explains,

“A side hustle is not a part-time job. A side hustle is not the gig economy. It is an asset that works for you”.

Using extra income wisely

Use the extra income from your side hustle or freelance work to accelerate your savings and investments. As Warren Buffett, one of the most successful investors of all time, advises,

“Do not save what is left after spending, but spend what is left after saving”.

Invest in your education and personal development

Investing in your education and personal development is crucial for maximizing your income potential in the long run. Pursue additional certifications or degrees that can increase your earning potential in your field. Attend workshops, conferences, and networking events to expand your knowledge and connections.

As Jim Rohn, entrepreneur and motivational speaker, famously said,

“Formal education will make you a living; self-education will make you a fortune”.

Staying relevant in your field

Continuously learning and adapting is essential to staying relevant in your field, especially in today’s rapidly changing job market. As Eric Schmidt, former CEO of Google, states,

“The world is changing so fast that the skills you have today are not the skills you’re going to need in ten years, or even five years”.

By focusing on your career growth, starting a side hustle or freelance work, and investing in your education and personal development, you can maximize your income potential in your 20s and set yourself up for long-term financial success.

Understanding the Importance of Wealth-Building Habits

Developing the right wealth-building habits is crucial for long-term financial success
Small, consistent actions can lead to significant wealth accumulation over time
Understanding the power of compounding, the dangers of debt, and the role of patience and discipline is essential

The power of compounding

Compounding is a fundamental concept in wealth-building that refers to the process of earning interest on your interest. When you invest money, you earn returns on your initial investment. These returns are then reinvested, generating additional returns on the larger sum. This cycle continues, allowing your money to grow exponentially over time.

The earlier you start investing, the more time your money has to benefit from compounding. Even small amounts invested regularly can lead to significant wealth over the long term. For example, if you invest $200 per month starting at age 20, assuming a 7% annual return, you would have approximately $1,000,000 by age 65. However, if you wait until age 30 to start investing the same amount, you would only have around $440,000 by age 65.

Real-world examples of compounding in action

Warren Buffett, one of the most successful investors of all time, started investing at age 11 and has relied on the power of compounding to amass his wealth. As of 2021, his net worth is over $100 billion.
The S&P 500, a stock market index that tracks the performance of 500 large U.S. companies, has delivered an average annual return of approximately 10% since its inception in 1926. This means that $1 invested in the S&P 500 in 1926 would be worth over $10,000 today, thanks to the power of compounding.

The dangers of debt and how to avoid it

While compounding can work in your favor when it comes to investing, it can also work against you in the form of high-interest debt. Credit card balances, payday loans, and other types of high-interest debt can significantly hinder your wealth-building efforts.

To avoid falling into the debt trap, prioritize paying off existing debt as quickly as possible. Focus on paying down the debt with the highest interest rates first, as this will save you the most money in the long run. Avoid taking on new, unnecessary debt and only use debt strategically, such as for education or a mortgage, when it can improve your overall financial situation.

Strategies for paying off debt

The debt snowball method: Focus on paying off your smallest debt first, while making minimum payments on your other debts. Once the smallest debt is paid off, roll that payment into the next smallest debt, and so on. This method provides quick wins and helps build momentum.
The debt avalanche method: Focus on paying off the debt with the highest interest rate first, while making minimum payments on your other debts. This method saves you the most money in interest over time.

The role of patience and discipline in wealth-building

Building wealth is a long-term process that requires patience and discipline. It’s essential to resist the temptation to make impulsive financial decisions based on short-term market fluctuations or personal desires. Developing a well-thought-out financial plan and sticking to it, even during challenging times, is crucial for long-term success.

One way to maintain discipline is by automating your finances. Set up automatic contributions to your investment accounts, such as a 401(k) or IRA, and treat these contributions as a non-negotiable part of your budget. This ensures that you consistently invest, regardless of market conditions or temptations to spend the money elsewhere.

The importance of a long-term mindset

Focus on your long-term financial goals, such as retirement or financial independence, rather than short-term market fluctuations
Understand that markets go through cycles, and downturns are a normal part of the process
Avoid trying to time the market, as this is often a losing strategy
Stay the course and trust in the power of compounding over time

Protecting Your Wealth and Planning for the Future

Safeguard your hard-earned wealth with proper insurance coverage and estate planning
Prepare for the unexpected by creating a will and communicating your wishes with loved ones
Seek professional financial advice to navigate complex financial situations and stay on track

The Importance of Insurance

As you build wealth in your 20s, it’s crucial to protect your assets against unexpected events that could derail your financial progress. Insurance plays a vital role in safeguarding your wealth and providing peace of mind.

Types of Insurance to Consider

Health insurance: Medical expenses can quickly eat away at your savings. Ensure you have adequate health insurance coverage, either through your employer or an individual plan, to protect your finances in case of illness or injury. According to Truist, having health insurance can help prevent financial stress and ensure better financial decisions.
Disability insurance: Your ability to earn an income is your most valuable asset. Disability insurance provides a safety net if you become unable to work due to an injury or illness, helping you maintain your lifestyle and continue building wealth.
Life insurance: If you have dependents or significant debts, life insurance ensures your loved ones are financially secure in the event of your untimely death. Term life insurance is often the most affordable option for young adults. Fulton Bank recommends considering life insurance to ensure financial stability for your family.
Property insurance: Protect your home, vehicle, and other valuable possessions with appropriate property insurance coverage. Review your policies regularly to ensure they keep pace with your growing wealth and changing circumstances.

Estate Planning and Preparing for the Unexpected

Estate planning may seem like a task for later in life, but it’s never too early to start preparing for the unexpected. By creating a will and communicating your wishes with your loved ones, you can ensure a smooth transition of your assets and minimize potential conflicts.

Creating a Will and Designating Beneficiaries

A will is a legal document that outlines how you want your assets distributed after your death. It also allows you to name an executor to manage your estate and guardians for any minor children. When creating a will, consider:

Listing all your assets, including bank accounts, investments, real estate, and personal possessions
Specifying how you want your assets divided among your beneficiaries
Naming an executor you trust to carry out your wishes
Updating your will regularly as your life circumstances change

In addition to creating a will, designate beneficiaries for your retirement accounts, life insurance policies, and other assets that allow for direct beneficiary designation. This ensures these assets pass directly to your intended recipients without going through the probate process.

Establishing a Trust

For more complex estates or to provide ongoing support for your loved ones, consider establishing a trust. A trust is a legal entity that holds assets on behalf of your beneficiaries, managed by a trustee you appoint. Trusts can offer several benefits, such as:

Avoiding probate, which can be time-consuming and expensive
Providing ongoing financial support for your beneficiaries
Protecting assets from creditors or legal claims
Offering greater control over how and when your assets are distributed

Consult with an estate planning attorney to determine if a trust is appropriate for your situation and to ensure it is properly established and funded.

Seeking Professional Financial Advice

As your wealth grows and your financial situation becomes more complex, it’s wise to seek the guidance of a professional financial advisor. An experienced advisor can help you navigate the challenges of wealth management, tax planning, and staying on track towards your long-term goals.

Choosing the Right Financial Advisor

When selecting a financial advisor, look for a fee-only fiduciary who is legally bound to act in your best interests. Consider factors such as:

Credentials and experience: Look for advisors with respected certifications like Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA), and experience working with clients in similar situations to yours.
Compensation structure: Fee-only advisors charge a flat fee or a percentage of assets under management, rather than earning commissions on product sales, which can help minimize conflicts of interest.
Communication style: Choose an advisor you feel comfortable communicating with openly and honestly about your financial situation and goals.

Regularly Reviewing and Adjusting Your Financial Plan

Your financial plan should be a living document that evolves as your life circumstances change. Schedule regular check-ins with your financial advisor to:

Review your progress towards your goals
Reassess your risk tolerance and investment strategy
Update your plan to reflect changes in your income, expenses, or family situation
Identify new opportunities for growth or areas for improvement

By proactively managing your financial plan with the help of a trusted advisor, you can stay on track towards building and protecting your wealth for the long term.

Diversifying Your Investments

As your wealth grows, it’s essential to diversify your investment portfolio to manage risk and optimize long-term returns. Diversification involves spreading your investments across different asset classes, sectors, and geographic regions to minimize the impact of any single investment’s performance on your overall portfolio.

Asset Allocation Strategies

Work with your financial advisor to develop an asset allocation strategy that aligns with your risk tolerance, time horizon, and investment goals. A well-diversified portfolio typically includes a mix of:

Stocks: Equities offer the potential for long-term growth but come with higher short-term volatility.
Bonds: Fixed-income investments provide steady income and can help balance the risk of stocks.
Real estate: Real estate investments, such as rental properties or REITs, can offer a hedge against inflation and generate passive income.
Alternative investments: Depending on your risk tolerance and financial situation, your advisor may recommend alternative investments like private equity, hedge funds, or commodities to further diversify your portfolio.

Rebalancing Your Portfolio

Over time, the performance of different asset classes can cause your portfolio to drift away from your target asset allocation. Regularly rebalancing your portfolio involves selling assets that have become overweighted and buying assets that have become underweighted to maintain your desired risk level and investment mix.

Your financial advisor can help you establish a rebalancing schedule and strategy, such as:

Time-based rebalancing: Reviewing and adjusting your portfolio at set intervals, such as quarterly or annually.
Threshold-based rebalancing: Rebalancing your portfolio when an asset class deviates from its target allocation by a predetermined percentage, such as 5% or 10%.

By regularly rebalancing your portfolio, you can help ensure your investments remain aligned with your goals and risk tolerance as your wealth grows over time.

Staying Informed and Educated

Building and protecting wealth is a lifelong journey that requires ongoing learning and adaptation. As you navigate your financial journey in your 20s and beyond, make a commitment to staying informed and educated about personal finance, investing, and wealth management.

Recommended Resources

Books: “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko, “The Simple Path to Wealth” by JL Collins, and “The Bogleheads’ Guide to Investing” by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf.
Podcasts: “The Ramsey Show” by Dave Ramsey, “The Bigger Pockets Money Podcast” by BiggerPockets, and “The Afford Anything Podcast” by Paula Pant.
Blogs and websites: NerdWallet, Investopedia, and Mr. Money Mustache.

Continuing Education Opportunities

Consider pursuing additional education and certifications to deepen your financial knowledge and skills. Some options include:

Attending workshops and seminars on personal finance, investing, and wealth management topics.
Enrolling in online courses or degree programs in finance, accounting, or financial planning.
Pursuing professional certifications like the Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA) designations.

By committing to ongoing learning and staying informed about best practices in wealth management, you can make more informed decisions and adapt your strategies as your financial situation evolves over time.

Your Path to Financial Freedom Starts Today

Building wealth in your 20s is all about developing the right habits and mindset. By creating a budget, living below your means, and investing early and consistently, you can set yourself up for long-term financial success. Remember, even small steps taken today can have a significant impact on your future wealth thanks to the power of compound interest.

As you continue on your wealth-building journey, don’t be afraid to invest in yourself and your career. Seek out opportunities for growth, start a side hustle, and never stop learning. By diversifying your income streams and continually increasing your earning potential, you’ll be well on your way to achieving your financial goals.

What’s one small action you can take today to start building wealth?

Whether it’s setting up an automatic transfer to your investment account or researching a new skill to learn, every step counts. Share your action plan in the comments below and let’s support each other on this exciting journey to financial freedom.

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About the author

Jeremy Horowitz

Jeremy's mission: Buy an Ecommerce brand ($10m - $100m revenue) and Saas app ($1m - $10m revenue) in the next year.

As he looks at deals and investigates investing opportunities he shares his perspective about acquiring bizs, the market, Shopify landscape and perspectives that come from his search for the right business to buy.

Jeremy always includes the facts and simple tear-downs of public bizs to provide the insights on how to run an effective biz that is ready for sale.