Note: This post was first published in November 2019 and updated in September 2022.
If you are in your 20s and reading this, let me promise you one thing.
At some point in the future, there will come a point in your life where you will think to yourself:
Ahh. If only I knew / did / thought / avoided [insert one] this earlier!
That thought may even be accompanied by a slap on the forehead.
The force of the aforementioned slap will likely correlate with the magnitude of whatever mistake or oversight you are trying to fix.
In other words, this:
Life can have a funny way of being the best teacher there is – but only for those lessons to come way too late to make a difference.
It’s kind of like going to primary school in your 70s. Could be fun but utterly useless.
Helpfully, in many areas of our life, society sets out certain parameters that can help us prevent doing serious damage to ourselves.
Hard drugs are illegal. Alcohol and tobacco are expensive. We have these annoying things called speed limits.
Like them or not, all of the things above are there to help you make it to your 30s and 40s in one piece, with most body parts still attached and functioning.
Unfortunately, the same doesn’t apply to saving, investing, and building wealth.
Leaving mandatory workplace pensions or 401(k) plans aside, we largely stumble through the first decade of our working lives. We have a vague awareness of the need to look after our financial situation – but never really get to it.
And then, typically in our 30s or 40s, we finally realize the scale of the missed opportunity.
Cue in that slap in the head, probably one of the stronger ones.
So if you are in your 20s and looking to make the kinds of financial decisions that help you build wealth AND avoid self-harm in the future, please read on.
Six Rules For Building Wealth In Your 20s
#1: Invest In Yourself Early On
Do you know what your biggest income-producing asset is?
Nothing will have a greater impact on your ability to live a rewarding life full of health and wealth than the combination of your education, skills, and network.
And while learning can and should be a lifelong process, the sooner you can start putting your knowledge and abilities to use, the more time you have to extract a return on them.
What that means in practice is that you need to finish your education as early as possible. If you want to do an advanced degree, don’t wait too long.
I graduated from my MBA program when I was 31. While there were good reasons for it (more on that below), I often wish I got it done two or three years earlier.
Having that extra time would be invaluable when it came to tackling the student debt I had accumulated.
To be perfectly candid, it would also help withstand the pressures of investment banking, especially in the early years.
So don’t delay. The sooner you can start putting your human capital to work, the more compounding runway you’ll have.
#2: Become A Money Expert
One of the few fundamental truths in life is that people who don’t understand money rarely get rich.
The good news is that you don’t need to be a genius to be wealthy.
As a matter of fact, geniuses rarely get wealthy as they tend to overintellectualize things all the time. Lucky for the rest of us I suppose.
You do, however, need to have a solid understanding of the basic principles of growing your net worth:
- The importance of budgeting and spending less than you make
- Basic principles of investing: the concept of compound interest, the relationship between risk and return, and the advantages of passive investing over active money management
- The concept of inflation and the danger it poses to your purchasing power over time
- Differences between the key various asset classes (cash, bonds, stocks, real estate)
- The various wealth-building tools at your disposal
- The basics of taxation and tax-efficient investing
Most importantly, remember that there are only a few money decisions that actually matter in life.
Focus on the big stuff, and the rest will take care of itself.
#3: Put YOUR Oxygen Mask On First
As you enter the workforce and finally start making money, things change.
You are finally in a position to help out your parents and relatives, lend a hand to your friends and contribute to charitable causes.
While all of the above are worthwhile endeavors, the most important thing you can do is get yourself on solid financial footing first before helping others out.
There’s nothing egotistical about it. It’s just that you can’t really help others if you fall down the first time life kicks you.
Besides, when it comes to helping others the gift of time is often much more valuable than money.
So pay off your debt and establish an emergency fund before you do anything else.
#4: Keep Your Expenses Low
When you are in your 20s, you often have little money, limited earning power, and very few tangible assets.
However, you’ve got absolute loads of the most important asset there is:
Being in your 20s means that the lever you have to realize investment gains over time is as long as it will ever be.
You’ll never have as much leverage as you do today
And the best way to make use of it is to reframe your thinking about spending money.
For example, assuming a 7% investment return, every $10 you save and invest today will turn into $107 in 35 years.
So the true cost of that extra pint in a pub is £53.50 and not £5.
The $600 weekend city break? That’s $6,406.
That extra $900/month on rent because you don’t want to live with your parents or roommates? That will actually be $9,600/month, please.
If there’s one thing I hate about personal finance, it’s what I call the latte lies. Don’t believe anyone who tells you that the only way to get rich is to deny yourself every single pleasure in life.
Equally, be intentional. As Ramit Sethi says: spend frivolously on things you care about and cut back ruthlessly on the things you don’t.
#5: Start Investing As Early As You Can
Saving money is important. You know what’s even more important?
Putting it to work.
Yes, Covid. Yes, valuations. Yes, inflation, war, China, Russia, Iran, my-brother-in-law-thinks-it’s-a-bad-idea, deficits yadda yadda yadda.
None of this matters when you have a long enough time horizon. Take advantage of it by starting to invest ASAP.
Contribute to your company’s workplace pension.
Build an index fund portfolio. Get on the housing ladder, even if it means buying a tiny place in the dodgiest part of town.
Don’t have money to invest? Get a part-time job or a side hustle.
In other words, please don’t be a silent witness while the market does this:
#6: Take More Shots
When I was three years into my first job, I took a leave to start a business.
I then spent a year working 100 hours/week trying to get it off the ground. Unfortunately, it never got enough traction and I had to fold.
Devastated, I went back to work for my old employer. More than a few people sniggered.
A year later, a few of my friends and I were applying for MBA programs. All of us had the audacious goal of getting into one of the top 5 US MBA programs.
Surprisingly, I was the only one to get in. Later, the school’s admission officer told me that it was my failed business experience that made all the difference.
In a pile of nearly-identical applications, my profile stood out – because I actually took a risk.
Everyone else was too worried about creating the “perfect” MBA profile.
No one cared that I failed. In fact, everyone knew that had I succeeded, I probably wouldn’t need an MBA in the first place.
The life lesson here is: if you want a guaranteed way to start scoring more goals, you need to take more shots.
The worst thing that will happen to you is you will fail.
Yes, losing sucks. But guess what?
You are young enough to absorb the impact and move on.
And the experience you’ve gained will likely continue to benefit you for years and decades to come.
Remember – You Are Already Rich
There are few sure things in life. I can’t predict the future any better than the next guy.
Do take my word for it – you will never have the same amount of health, energy, and youthful looks as you do today.
Remember that – because life has a habit of sneaking up on you.
The other day, I woke up to notice the first strands of silver in my hair. Climbing four flights of stairs gets tougher on your knees all of a sudden.
And while it may seem counterintuitive to you now, come 9 pm on a Friday night you often feel like curling up with a book as opposed to going on yet another bender.
I think it was Monevator who once wrote: if you are young, you are already rich. I couldn’t agree more.
Remember – your 20s is a truly special time.
Follow the rules above. Enjoy it. Make the most of it.
As always, thank you for reading!
PS: If you are not in your 20s anymore, don’t despair – there’s still plenty of time to rev up the engine.
Here are my top five tips on how to build wealth in your 30s.
Cleared the 40 mark? Have no fear – because this is how to build wealth in your 40s.
And we have some advice for folks in their 50s, too!
About Banker On Fire
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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
Find out more about me and this blog here.
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