How do I actually build wealth in my 20s?

<div class="user-question">Hi Frich! I keep hearing that I need to focus on building my net worth but how do you actually do it???? How can I build wealth in my 20s?</div>

Hi Frichie! I'm Phil & I've worked as an investment consultant, and now help people build personalized financial plans. It sounds to me like you could use a financial plan to start building your wealth!

Let's dive into my top recommendations for young people working on building their wealth⬇️

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⭐️Understanding the basics of the wealth mindset

Growing wealth is a mindset as much as a journey. Like preparing for a long hike or getting ready to take a hot yoga class, it’s best to know what’s ahead of you before starting off. To set yourself up for success, lay the groundwork:

1️⃣ Establish clear financial objectives. Start now by defining the purpose of your investing – are you starting your retirement fund, saving up for a house, growing your rainy day fund, or something else?

2️⃣ Stay disciplined about your goals. Make consistent, intentional choices that align with your goals, just like you would sticking to a healthy diet or maintaining an exercise routine. Create a budget that reflects your current circumstances to help you get there and live below your means to reign it in.

3️⃣ Keep investments on your mind. Start investing as early as you can – now, if you haven’t already. The more time your money has to compound, the more it will grow by the time you start withdrawing funds.

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⭐️6 best ways to build wealth

These six strategies are the best tips to keep in mind for long-term wealth creation.

1️⃣ Minimize the impact of taxes on your assets.

One of the most important parts of any wealth-building strategy is minimizing taxes. Even if you timed the market perfectly, tax-efficient investing can lead to higher after-tax returns. When you consider all the benefits that tax minimization has to offer, you might wonder why you didn’t try it sooner. But it’s not your fault. Tax minimization isn’t talked about as much as investing in the stock market or gaining interest on a savings account – even though it’s far more reliable than the first and more lucrative than the second!

2️⃣ Live as far below your means as possible.

Living below your means allows you to continue saving and investing to grow your wealth. It doesn’t mean you have to give up every possible comfort, miss every concert, or skip out on ever taking a vacation. But living below your means involves denying yourself some pleasures in the present so that you preserve money for retirement when you’d rather not worry about supplementing that income with a job.

3️⃣ Make wise investments – and play the long game.

There are many ways to invest your money – too many to count, even. But there are a few common investments (or asset classes) you should know about:

• Individual stocks: Shares in a company’s value historically provide positive returns over the long run. However, this isn’t always the case. Individual stocks can be volatile, so they shouldn’t take up a majority of any investment portfolio.
• Individual bonds: These are essentially loans that you provide to the government (or a corporation), and in return, you receive interest periodically. They’re a more conservative option than stocks because they can provide a steady income stream and balance out a portfolio heavy in riskier investments.
• Retail funds: These are professionally managed pools of money, like mutual funds and ETFs, overseen by a fund manager who selects a blend of assets for you and other investors in the pool. While less risky than individual stocks because they spread investments, retail funds can still lose money.

Aim to invest in index funds as much as possible – it’s a way to purchase across the entire stock market at a lower cost than buying individual stocks. That means mutual funds or exchange-traded funds (ETFs), which are similar to mutual funds but purchased at market price and don’t usually have minimum purchase requirements.

There are many rules of thumb that you can follow to allocate your investments. Try the following for the simplest idea of how much money to invest and where:

• OYAIB rule: The “Own Your Age In Bonds” (OYAIB) rule measures how much of your money should be in bonds, generally considered a less profitable but also less risky investment than stocks. Whatever your age, you should allocate that much of your portfolio to bonds. If you’re 30, just 30% of your investments should be in bonds, for example.
• 100 minus age rule: The flip side of the OYAIB rule is to subtract your age from 100 and put that percentage of your portfolio in equity investments – a riskier investment with greater potential to fluctuate, like company stock. Keep the rest in debt, which guarantees lower but more stable returns, with options like bonds.

4️⃣ Learn the good, the bad, and the ugly about debt.

Unless you have unlimited cash flow, you’ll probably take on debt occasionally to finance large purchases like a house, a car, or a college education. And that’s perfectly fine – debt, when managed wisely, can be a key part of building wealth.

Here’s why debt can play a crucial role in wealth-building:

• Tax advantages: Certain types of debt often come with tax benefits. For example, interest from mortgages or federal student loans can be tax-deductible. This reduces your taxable income and, in turn, can lower your overall tax liability, leaving more money in your pocket to invest.
• Credit building: Managing debt responsibly can help you build a strong credit history. A good credit score can open doors to favorable terms on future loans, like lower interest rates, making it easier and more cost-effective to borrow when needed for wealth-building ventures.

However, there’s good debt and bad debt. Good debt refers to borrowing money to potentially increase your net worth or generate future income, like mortgages and student loans. On the other hand, bad debt refers to borrowing money for purposes that don’t contribute to your financial well-being or might even hinder it, like credit card debt and payday loans.

5️⃣ Take advantage of passive income streams.

Passive income represents income generated with minimal ongoing effort or active involvement. It’s a cornerstone of wealth-building because it continues to produce income while you’re not directly involved with it.

These all provide diversification and reduce your reliance on a single income stream, making your long-term wealth growth more stable and sustainable.

Passive income also gives you time and freedom, which are two of the main goals of building wealth in the first place. It can even act as a financial cushion, providing a steady income stream during economic downturns or unexpected financial challenges when your earned income might be at risk.

6️⃣ Adapt as you grow.

Once you hone in on your goals and start building wealth, you need to keep one hand on the wheel and one eye on the road – that is, make sure that you’re aware of the ongoing status of your financial accounts and that you can interfere to correct or change course when you need to.

These are some great ways to adapt:

• Protect your ass(ets): Create a simple financial tracker to monitor your income, expenses, and investment performance. This dashboard helps you stay on top of your financial progress.
• Stay flexible: Life is unpredictable, and sometimes you encounter detours or unexpected obstacles that force you to change course. When that happens, don’t be afraid to adjust your strategies. In fact, building wealth is all about shifting your game! Whether it’s a sudden expense or a change in your goals due to a life event, flexibility is your ally. Revisit your budget and investment plans to ensure they align with your current circumstances.
• Measure your progress: Your wealth-building goals are destinations on your road trip to early retirement. To ensure you’re headed in the right direction, keep checking the map to assess your progress. Are you getting closer to your goals, or should you adjust? Analyze savings, investments, and debt reduction efforts.
• Seek expert advice: Even seasoned travelers consult maps and guides. Consider seeking advice from financial experts to provide valuable insights and help you make informed decisions. They can assist you in navigating complex financial terrain and provide direction when you encounter changes.
• Automate when you can: Using an automated financial planning tool can help you rest easy knowing you’re making the best decisions about your money related to your goals.

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⭐️Here are the tools I'd suggest to start building wealth in your 20s:

Era - for creating your own personalized financial plan

PocketSmith - for tracking your budget and seeing if you're living below your means

Our top choices - for building your emergency fund while earning interest on it

H&R Block - for making your smartest tax moves

Acorns - start investing with just the roundups from your purchases

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Btw - here's how others are doing👀

Which one of these stresses you out the most?

🧑‍💻36% The trajectory of my career and salary

💵32% My current financial situation

🏡23% Opportunity for big future purchases (house, car etc)

🏦9% Paying off my loans

I hope this was helpful & good luck on your wealth building journey!

Phil Wettersten