10 Ways to Help Build Wealth When You’re Young
If you’re in your 20s and already thinking about building wealth and how to get ready for retirement, kudos to you! There’s no greater gift you can give yourself (and your future family) than the gift of financial security.
When people think about building wealth, they often think about investing. But the truth is, building wealth is more than just investing. It involves taking a look at your current financial situation, figuring out where you want to be and developing a plan to get you there.
If you’re wondering how to get started, here are 10 tips to start building wealth when you’re young.
1. Start Investing Early
The cool thing about investing at a young age is that time is on your side. Your wealth has upwards of 50 years to grow, so you may be able to make riskier investments that yield a higher return. Throw compound interest in the mix, and you’ll have a much larger nest egg than those who wait to invest.
Here’s an example of how much money you’d have by age 65 if you invested $250 a month at 8 percent interest.
- If you started at age 25, you’d have $878,570.
- If you started at age 35, you’d have $375,073.
- If you started at age 45, you’d have $148,236.
You’d have almost $750,000 more saved just by starting in your 20s. Albert Einstein said compound interest is the eighth wonder of the world, and he was right!
2. Track Your Spending
The road to building wealth starts with a budget. Why? Because you can’t invest money until you have a clear picture of your current financial situation.
To create a budget, add up all your expenses and then subtract that number from your monthly income. Is that number negative or positive? If it’s negative, you’re spending more money than you’re bringing in. Cut out unnecessary expenses until you get a positive number. If it’s already positive, then you’re living within your means. Invest the extra money or use it productively and pay yourself in the long run.
3. Pay Off Debt
If you’re young, there’s a chance you may have student loans or credit card debt. These forms of debt often have high-interest rates, and they can eat away at your ability to build wealth. For example, if you’re earning 8 percent in the stock market, but you’re paying 20 percent in credit card interest, then you’re not building wealth.
If you have high-interest debt, consider holding off on investing until you can pay it off. Only then will investing have a true impact on your net worth.
4. Avoid Lifestyle Inflation
Here’s a scenario that happens every day: Someone gets a raise; they buy a nice car. They get another raise; they buy an even nicer car. While you may be keeping up with the Joneses, it’s a quick way to rack up debt.
Strike a balance between splurging on items that bring you joy, and avoiding purchases that set you back on the road to building wealth. If music is your passion, it’s probably OK to spend money on a monthly music streaming service. But if you could care less about cars, don’t buy a brand-new Tesla just because your coworkers all have one.
5. Take Advantage Of Your Employer’s Retirement Plan
Did you know that most experts recommend having enough money in retirement to last 30 years? That’s almost as many years as you’ll spend in the workforce! With retirement often spanning decades, you’ll need to make sure you have a big enough nest egg to carry you through. An easy way to help you do this is through your employer-sponsored retirement plan.
If you’re not already, look into contributing to your retirement plan now (even if you can only contribute $50 a month). If your employer offers a contribution match, try to invest the amount needed to get the full match. If you invest 2 percent of your income into the account and your employer matches 2 percent, that’s a 100 percent return on your investment! Not too shabby.
6. Choose The Right Investment Strategy
Investment strategies aren’t one-size-fits-all. If you’re young, you may want an aggressive investment strategy that focuses on higher returns. As you near retirement, you may want to adopt a more conservative strategy that protects your nest egg.
An easy way to help reduce investment risk is through diversification. Buying Exchange Traded Funds (ETFs) and low-cost mutual funds are two ways to diversify. With these products, you invest a little money in a wide range of companies instead of a lot of money in a few companies.
Some of these companies may be high risk, while others may be low risk. Some may be in the U.S., while others may be in emerging economies around the globe. Either way, you should lower your overall risk by spreading out your investments.
7. Invest Regularly
No matter what the market is doing, keep investing. Add money to your accounts every month, and don’t think any more about it. As your income grows, you may want to increase your investment amount. If you want to take it to the next level, have your investments automatically taken out of your paycheck every month.
Discussing your finances with a financial advisor, along with your specific situation, concerns and goals, is always recommended when starting a comprehensive financial plan. If you’re in your 20s and 30s, look for an advisor who specializes in working with young people and building wealth.
8. Don’t Be Afraid Of Stock Market Volatility
Stock market volatility is completely normal, so don’t fret! Think of volatility as changes in the weather. When summer is approaching, the temperature doesn’t increase by a few degrees every day. Instead, it may be 65 degrees one day, 58 the next and then 70 the next. There’s a mix of high temperatures and low temperatures, but it eventually gets hotter.
The stock market is the same way. It may swing up and dip down, but history has proven that it corrects itself. During volatile times, keep your long-term goals in mind and don’t act on your short-term emotions. Emotional investing is very dangerous and can lead to expensive mistakes. Working with a financial advisor who you trust can be priceless, as you can leave the worrying to someone else.
9. Always Invest in Yourself
Never underestimate the power of investing in yourself. If there’s something you want to do to speed up your career, do it. Learn a new skillset, get that degree, earn that certificate and improve your work ethic. These may seem like financial setbacks right now, but they can be the quickest way to build wealth in the future.
10. Get Help From a Professional
As you begin to accumulate wealth, we recommend seeking guidance from a trusted financial advisor. As an expert in the field, a financial advisor can help you:
- Maximize your return on investment
- Lower risk in your portfolio
- Manage your debt
- Develop a solid retirement plan
- Reduce your tax burden
- Reach your financial goals
In other words, turn to a professional to help show you how to build wealth quickly and how to get ready for retirement – the retirement you have in mind.
ARQ Wealth Advisors offers two programs that specifically help young people reach their financial goals: The ARQ Wealth Millionaires Club and The ARQ Wealth Apex. We want to help you create an investment strategy that leads to lasting wealth.
To learn more about how we can serve you, schedule an appointment with us so we can start the conversation today.