8 ways to prepare for financial freedom in your 20s
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Your 20 years are a turning point. Now is the time to enjoy the greatest freedom you will have until retirement. It’s also the perfect age to start investing because you have plenty of time and can enjoy the magic of compound interest.
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Over the years, I have built 7 figure businesses for myself and made solid investments with big returns. But making the right choices in my 20s saved me years of pain, heartache, and frustration, and it can do it for you, too.
There is a saying, “The more you risk, the more you can win.” Here are eight financial principles you can start practicing in your 20s that will help you achieve long-term success.
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1. Understanding Compound Interest and Valuation
One concept that is generally overlooked when people make long term financial decisions is the impact and concept of inflation. My parents always told me to put at least 10% of my income in a savings account and 10% in a retirement account. Saving small today can add to real wealth in the future with compound interest. But beware: compound interest is a double-edged sword: a small debt today can be added to a large debt tomorrow.
Additionally, try to make financial decisions based on evaluations. Buying a home isn’t always a bad decision. In fact, a Harvard University study found that landlords have higher equity than renters. On the other hand, investing in stocks at higher valuations is not a good decision. You should aim to invest in assets available at an attractive valuation.
2. Generate passive income
The faster you can make your money work for you and generate income while you sleep, the faster you can live the life of your dreams, reduce your stress, and possibly live longer too. This is difficult to grasp, especially for high incomes. Every dollar you passively earn is worth $ 10 you’ve earned trading your time. When you generate passive income, you create the ultimate form of freedom. Your time on this planet is limited and it is important to find ways to ensure that you are maximizing your income while minimizing your time spent working.
3. Avoid bad debts
Whether it’s credit cards or student loans, make smart decisions when borrowing money. Borrowing money with credit cards, payday loans, and short-term loans from a bank can lock you into a cycle of debt that seems impossible to overcome. This type of debt carries a high interest rate and should be avoided except in emergencies, and this type of debt should never be used to finance ostentatious spending.
4. Make friends with good debt
Not all debt is bad debt. Take, for example, a mortgage on a house. The median price of homes in the United States is around $ 310,000. If you take out a 30-year mortgage on a home at this price with a down payment of 20% to 4% interest, you will end up paying a total of $ 532,795.47 (including interest). However, the inflation-adjusted home value after 30 years is expected to be $ 613,240.33, which allows you to make a 15.1% profit on your debt. On the other hand, if you had spent that money on rent over the same 30-year period, you wouldn’t own anything.
5. Save to invest
Some young people, especially millennials who came of age during the 2008 financial crisis, are naturally wary of stocks, mutual funds and other financial instruments. They prefer to keep their money in cash instead of risking it in the market. But history has shown that, over long periods of time, exposure to the market is the best way to ensure that your money grows faster than inflation.
Of course, the markets fluctuate over time. But on average, the S&P 500 has earned an average annual return of 4.2% since 2000, while average annual inflation over that period was 2.3%. A dollar invested in 2000 would have turned into $ 2.10 today. This despite the recession that followed the dot-com collapse and the Great Recession of 2008. If that same $ 1 was held in cash, it would only have 66.4% of its purchasing power today.
I would also recommend investing in assets that have all three of these benefits:
Increase in value over time which can then be sold for a profit
You pay monthly / quarterly positive cash flow
Benefit from tax advantages like a 1031 exchange on real property
When making investments, you should always think about and prepare for the worst case scenario. People generally expect good returns at the best of times, but have no strategy in place when the going gets tough. Diversification is also essential. Remember to never put all of your eggs in one basket.
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6. Borrow only what you need
While having the right degree opens up opportunities to earn more in your lifetime, no one told me about the debt I would accumulate in the process. Student loans can be a good form of debt, but only if your future income can support it. The debt you incur to finance higher education should never exceed your expected future income.
7. Avoid conspicuous consumption
The simplest principle that will help you immediately take control of your financial destiny is to embrace minimalism and avoid consumerism. Really rich people don’t flaunt their wealth. They save and invest their money instead of spending it on trinkets to make themselves look rich. You may have to give up that new pair of Nike’s or eat more often, but at least you won’t be forced to eat cat food at 70. This Integer Group study finds that 64% of consumers don’t necessarily think this brand – the named products are better than the more affordable options. Really rich people don’t care what other people think of them and have no desire to impress others around them.
The way I define minimalism is simple: only spend money on things that you need or that bring real value to your life.
8. Be patient
When I was younger I wanted success and I wanted it now – and I was willing to take on debt to get it. If you watch TV a lot, you might get the impression that people are becoming financially independent and racking up the traps of an upper middle class lifestyle overnight. I later realized that wealth accumulates over a period of time. I had to learn to be patient and disciplined in my investments and expenses.
Your health and mental peace are your greatest assets. Never compromise your health for money, even if you think you can at 22. We all have potential. We are unique, but we are not that different from each other. We can all be someone, but how much we want to be that person is what shapes your actions from today. And there’s no better time than your 20s to dream big, think big, and most importantly, act big.
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