You’re in your early 20’s and want to know the best ways to get started investing. You’ve taken a significant step today by doing the research now to help you map out your financial future. You have plenty of time ahead of you to build the life that you deserve. In the following article, I will tell you what you can start doing today to achieve the financial success you want in life.
Things we will be discussing in this article.
- Student Loan Debt
- How to invest
- Debt in general
- House hacking
- Maximizing your Roth IRA
- Start Building Semi-Passive Income
- Time Is Your Friend
I am writing this as if I am writing to my own daughter. Here are the ways that you can set yourself up for tremendous success and even potentially retire by the time you’re 30. Are you ready to get started?
Don’t Be Afraid To Learn A Skill Or Trade
I am not going to talk horribly about college like some folks. I have my MBA, and I am genuinely grateful for the education that I have been fortunate to receive in my life. However, I would have done things differently today if I could go back in time.
Don’t think of formal education as the end all be all. Over the last 20 years, education has changed significantly. You no longer need a piece of paper to get a great job. If you want to go to college, I applaud you. Just be smart about it.
What I mean by this is, don’t go to a school that will cause you to go into tremendous amounts of debt before you even graduate. Don’t take out loans to live off because that debt will hang over your head for the next 30 years.
The Real Cost Of College
An article by USNews.com states, the cost of tuition for one year at an in-state school is $9,687, and at a private university, you are looking at a price tag of roughly $35,000 per year. That means if you finish your degree in 4 years, you have racked up about $40,000 in debt on the low end and $140,000 of debt on the high end before you ever start working. If you go for 5 years, that amount could be higher.
If you take out loans for living expenses as well? You’re right. The amount of the loan you take out will also be higher to adjust for these expenses.
The average person tries to pay their student loans off over a 10-year time frame. That means your payments could range from $400 a month up to $1,400 until the loans are paid in full. This mounting debt is what sets us back, and I know from experience. I am the guy that went to private school and racked up over six figures of student loan debt.
Again, it isn’t that school isn’t great. There is a lot of value taught in college. Still, I also believe you need to be a good steward of your money and not allow yourself to take on a tremendous amount of debt. There is no guarantee you will have a job when you graduate. And the debt will continue to accumulate even if you can’t pay back the loan.
Education is excellent, so long as you don’t fall into crippling debt to go to school.
How To Invest
Investing can be done in many forms. You can choose to invest in the market by buying stocks and bonds. You can invest in real estate, start-ups, and many other opportunities out there. Now, I’ve touched on how I would invest in another article you can find here where I talk about Broad Based Index Funds and how to invest like a millionaire. However, I will say that it is smart for the bulk of your assets to be invested in something like the S&P 500 through an index fund like the Vanguard S&P 500 ETF (VOO).
Traditionally, a fund like this has earned roughly 13% returns on average for the past 10 years. Now, I need to explain that past performance is no guarantee for future results. I just believe that a fund like this is good to hold with the bulk of your assets. Feel free to take a smaller portion of your assets, 30% or less, and diversify it over several other opportunities.
If you’re not a risk-taker, that is fine as well. Make sure that you throw in some bonds to offset the volatility risk of the S&P 500. This could range anywhere from 0 – 50% of your portfolio. It all depends on the level of risk that you’re willing to take. Remember that bonds, while safe, aren’t paying much and will have a significant impact on your overall returns.
Debt In General
Your 20’s is the perfect time to get your finances under control. For many, you are just stepping out into the world for the first time. You are getting your first real job, maybe your first house, and possibly starting a new family.
If you want to set your future up for success, the best way is to start managing your assets now. Don’t allow yourself to go deep into credit card debt. This can have a detrimental setback to your financial future.
Here are the main lessons I would teach my 20-year-old self.
- Don’t buy a brand new car
- Buy all of your vehicles with cash
- By the oldest version of the newest model of the car you want
- Don’t buy an enormous house that you don’t need
- Avoid Credit Card debt like the plague
I will touch on housing here in the next section, but I want to touch on both vehicle debt and credit card debt for now.
If you want to halt leveling up your lifestyle, buy a brand new car and max out your credit cards on things you don’t need. The worst thing you can do is to get yourself in a position where 100% of your paycheck is spent on bills before you even receive it.
One of the biggest struggles people face, especially early on in their career, is lifestyle creep. You get that new job, and suddenly, you have a considerable inflow of cash, so what do you do with it? Let’s get the brand new car and all of the cool gadgets you want.
This is definitely the worst thing you can do, but why is that? With lifestyle creep, you will find that your bills rise up to meet your new income as you make more money. If this is the case, you can never get out of debt and become financially independent.
Purchasing Cars
You want to buy cars that you can save up and pay cash for. The more cash flow that you have allows you to set more assets aside for future purchases. In essence, your expenses are lower than your income, and you now have positive cashflow. It also means you’ll be better off if the situation with your source of income changes. Many Americans are living paycheck to paycheck, and if they experience a single hiccup along the way, they immediately fall into emergency mode because Americans haven’t saved enough assets to sustain them while they get back on their feet.
The house you want to buy is one that you can comfortably afford, not one that puts you at the top of your budget. This seems to be more difficult in different places around the U.S., where the cost of living is significantly higher. Still, if you can find a low cost of living (LCOL) area and have the ability to work remotely, this can have a tremendous impact on your future.
Credit Card Debt
The last piece of the puzzle that many people, not just 20-year-olds, find that they have the biggest issue is credit card debt. I talk about how I had run up over $30,000 in credit card debt at one time. This is the worst thing you can do! You end up paying a ridiculous rate of interest, anywhere from 12% to 24.99%. You’re losing in that situation every time.
If you’re invested in the market, a good average return is 8 – 10%, so if you can average that year over year, you’re going to become successful. If you’re paying double that to a credit card company, see how they win and make billions each year off your hard work?
I am now of the mind that the only sound credit card offers benefits. There is nothing wrong with using a credit card. Just make sure that you pay it your credit card off immediately. Feel free to get all of the cashback rewards you want, or collect those travel rewards to take some luxury vacations.
Remember, use credit for your benefit. Don’t go into debt and pay insane amounts of interest to a credit card company. That is how they make their billions off of hard-working Americans.
House Hacking
This is a concept I wish I had learned earlier in my life. Depending on where you live, housing is often the most considerable expense you have and can sometimes take up more than 50% of your take-home pay.
What if there was a way that you could potentially buy a house and live there for free? Not only could you live there for free, but you would be paid to live there? House hacking is the key, though it isn’t for everyone.
Multi-Family Homes
There are multiple ways to house hack, but let us discuss what house hacking is, to begin with. House hacking is when you purchase a property, either a multi-family unit, meaning more than one living space in a single building, or a single-family home, or SFH. If you purchase a multi-family unit, whether it is a duplex, triplex, or quadplex (4 plex), you can live in one of the units and rent out the rest. This will either mostly or entirely cover the mortgage payment, which allows you to live nearly rent-free.
There are numerous stories of individuals doing this that allowed them to pay off their student loans and other debt as they built their real estate empire. After a few years, the beauty is you can save up some funds, buy another property to move into, and rent out the new units as well as your old one. This will allow you to build net worth and residual income.
Single Family Homes
If you purchase a Single Family Home, the process is a little different. In this instance, you have to be pickier, as you would be renting out a room in your own home to someone that you trust. I did this for several years with a friend and colleague when I traveled extensively for work. I collected the rent for them to live there, and in turn, I also knew I had someone to watch the house when I was on the road for weeks at a time. It was a win-win for me.
Once you have a family, it becomes much harder to house hack. If you can tackle this early, it is a great way to not only pay your mortgage with other people’s money, but it also allows you to be able to quickly pay off your home. This would free up significant amounts of cash flow while building your net worth. Pretty cool, huh?
This simple process can put you lightyears ahead of those around you and provide you with a stable income. It also allows you to test the waters of real estate investing. This method’s beauty is that you can get into your first house potentially with as little as 3% down!
Maximizing Your Roth IRA
You’re probably wondering how this is an investment-related post, and we haven’t really talked about investing in the traditional sense, huh? Well, this is where we get into the good stuff. You remember when we talked about how college debt can have a considerable impact on your financial future?
On the low end, we discussed that you may be paying around $500 a month. If you were to pay for college as you go instead, even if it takes you longer to graduate, you would be free to invest that $500 into a Roth IRA.
If you were to start investing this amount at age 25 and retire at 67 and have it grow at 8%, your account would grow to over $2,000,000. I know that seems insane to think about, but that is the value of compound interest over time.
If you don’t want to work until you’re 67, I don’t blame you! The more assets you can put aside today to help save for retirement and grow passive income, the sooner you can retire. This opens up the opportunity to do the things you love, so you’re no longer working because you have to but because you want to.
The beauty of investing in a Roth IRA at a younger age is that your portfolio will grow tax-deferred. When you decide to start taking income from your Roth IRA, it will now be completely tax-free.
Given that our tax rates are relatively low right now and we may see higher rates in the future, this works out in your benefit. You will have to pay 0% tax on all of your earnings, so long as you meet the 5-year investment history or you’re age 59 ½.
Start Building Semi-Passive Income
Passive Income is the goal of any entrepreneur out there. Truly passive income is hard to achieve, but you can create semi-passive income through a few different means if you’re smart about it. This can be done in several ways. The trait for anyone in their twenties to take advantage of is their energy. You can work longer and harder than someone in their 30’s and 40’s with kids and family responsibilities.
This is the perfect time to build a side hustle and invest in real estate and the stock market. You want to build a business that can make you income while you sleep. This will turn you into a business owner and let you take advantage of the many tax advantages that come along with it.
So what types of side hustles are out there? You could literally build any kind of business that you wanted. The point is to start small and grow it over time until it eventually overtakes your regular income. You can transition to focus on growing your own business exponentially at that point.
Here are some examples of businesses in which you could get started building today.
- E-Commerce
- Service as a Software (Saas)
- Affiliate Marketing
- Join the Gig community at Fivver or Freelancer
- Become a Virtual Assistant
- Try your hand at Voice Acting
- Buy and Invest in Real Estate
- Become a Freelance Writer
- Rent out rooms on Airbnb
- Create an e-Learning course
This is not an all-inclusive list but a start to get you thinking differently about the opportunities out there. Your future is in your hands. Each of these could lead to something extraordinary if you put in the work. And even if they fail, you’ll learn from your mistakes and get better at your next attempt.
Time Is Your Friend
When you’re in your 20’s, the most incredible thing you have going for you is time. Use time to your advantage. From an investing perspective, you have over 40 years to let your money sit and grow. You have 40 years to learn new skills, build businesses or grow a real estate empire. At this stage, the more you can save today allows you to be exponentially better off in the future.
Sit down, decide what you want for your future, and go out and work for it. You don’t need to know everything to get started. You just need to start taking action. Learn a new skill, find your passion, build a business and get your assets working for you. The more freedom fighters (money) you can create, the faster you will achieve financial independence and freedom.
Wrap up
In this article, we have talked about a multitude of different things. It doesn’t matter what your end goal is in life. Debt is your enemy and will keep you working until you’re dead. You need to learn to manage debt and life creep to live the life you want.
Don’t let yourself get stuck in student loan debt that takes 10, 20, or even 30 years to pay off. It really isn’t worth it in this day and age. You can get all of the education you need online through legitimate colleges and universities.
Remember that credit cards are a tool meant to be used by you for whatever benefits they provide. Maybe it is a cashback bonus, or perhaps it is travel rewards. It doesn’t really matter so long as you don’t let credit cards control your life.
Look into house hacking while you’re young, not just for a way to potentially live rent-free, but to purchase a house using someone else’s money. You can use this concept to buy multiple homes over a concise time frame if you’re smart. The goal here is to get your money working for you so you stop working for your money.
Make sure that along the way you maximize your Roth IRA contributions. This can be instrumental to early retirement potential. You can use these assets to grow your wealth and retire without paying any income tax on the back end.
Create wealth through a side hustle. This could catapult you to quitting your regular job and building a dream life. Even if you don’t reach that level of success on your first attempt, you will learn new skills along the way to help you eventually get there.
Time is your friend. Embrace it. Time is what will allow you to work harder, smarter, and longer than those older than you. By doing this, you will put yourself in a position to live your dream life, but don’t forget to take time for yourself.
As always, thank you for reading. If you have any comments or questions, please leave them in the comments below.
Stay Happy.
~ M
Disclaimer: Just My Little Mess does not provide tax, investment, or financial services and advice. The information is presented without considering the investment objectives, risk tolerance, or financial circumstances of any specific investor. It might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.