I'm in my 20's: What are the Best Ways to Plan, Invest and Build Wealth for my Future?
AI's response in regular print | Beverly Hills, CFP®, Joe O'Boyle's in italics
“I'm in my 20's, what are the best ways for me to plan, invest and build wealth for my future?”
Starting to plan your financial future at a young age is a great way to take advantage of your biggest asset as an investor… time. Here are some of the initial steps to start you on your journey to building wealth.
Remember, everyone's financial situation and goals are unique, so these steps may vary somewhat based on your individual circumstances. Please adjust them as needed to suit your personal needs and aspirations.
Create a Written Financial Plan & Articulate Your Goals: What is the vision you have for your life? Start by writing down your short-term and long-term financial objectives. In order to actually make the choice to save and invest for you future, you have to start with why you’re doing it. Be specific about what’s most important to you. Your goals may include saving for a house, starting a family, planning for world travel, living and working abroad to experience a new culture, starting your own business, or working towards financial independence and having the ability to retire early. In order to avoid wasteful, impulsive spending in your twenties—where your spending doesn’t provide you with value—you will want to develop a written financial plan for achieving your objectives. When delaying gratification and investing for the long-term, start with your “why”.
Live Below Your Means & Automate Your Savings: Create a budget that you call “my spending”. Track your take-home income (the money that comes into your checking account each month) and your spending (the money that goes out of your checking account each month) so you are aware of exactly where your money is going. Remember that “my spending” represents your choices with money, so you are in control. Differentiate between your needs and wants. Taking responsibility and ownership over your money choices in your 20’s will help you create good habits for managing your finances effectively over your lifetime.
Pay yourself first by automating your savings plan so that you are saving and investing first and spending second. This way, you build the crucial habit of “living below your means” which is another way of saying “spending less than you make”. By spending less money than you take home each month, it allows you to save and invest towards your specific goals. Living below your means is perhaps the most important financial habit and key indicator of a successful financial plan.
In my 20 years of financial planning experience, I’ve found that most folks can’t answer these 3 simple questions:
—Exactly how much am I taking home every month?
—How much am I spending each month? (pro tip: use your last 3 month spending average and then compare that against your last 12 month average monthly spending figure)
—How much am I intentionally saving and investing each month towards my goals? (pro tip: make a commitment to yourself by writing down your goals and tracking your progress)Build an Emergency Fund: Your emergency savings fund serves as a safety net for life’s unexpected expenses or income loss. Many financial planners recommend saving 3 to 6 months' worth of living expenses in a conservative high-yield savings account or money market fund. This target amount should be sufficient to cover all of your necessities such as rent or mortgage payments, groceries, utilities, transportation costs, and health care expenses.
Depending on your career type, many of our more successful clients actually aim to save up 12 to 24 months worth of emergency reserves. They set up an automatic monthly savings plan towards building up their emergency fund as a top financial planning priority. For example, if you spend $5,000 per month on necessities, your emergency savings goal may be around $60,000. Start today by saving a small amount from each paycheck and build up your emergency reserves over time. Ideally, the interest you are earning in your emergency savings fund is growing faster than inflation, net of taxes, otherwise you are losing purchasing power over time.Pay Off High-Interest Debt: High-interest debt, such as credit card debt with 20%+ interest rates, significantly hinders your ability to save and invest and is a toxic, destructive force against achieving your financial goals. Prioritize being debt-free and attack your credit card debt. Remember to use credit cards only when you’re sure that you can pay the balance off in full each month. If you’re currently carrying credit card debt (beyond what you pay off each month in full), STOP using your credit cards and pay them off aggressively.
After you have paid off your high interest credit card debt, start attacking your student loan debt. Break up your various student loans into tranches (different buckets) and work on aggressively paying off one tranche at a time. Paying off each student loan tranche creates positive momentum and helps keep you focused and motivated towards paying off the next tranche until you are ultimately debt-free!Start Investing & Contributing to Retirement Accounts: The earlier you start investing, the more time your money has to potentially grow and compound.
We typically recommend our clients in their 20’s contribute to an after-tax Roth 401(k) through their employer, an after-tax Roth IRA, and a pre-tax Health Savings Account (HSA). This strategy offers up a tax-free planning trifecta because your money is potentially growing tax-free across all 3 tax-advantaged retirement account types.
—Roth 401(k): If offered by your employer, you may contribute up to an after-tax maximum of $22,500 via payroll deductions, during the 2023 calendar year, to your Roth 401(k) plan. At minimum, you will want to contribute enough to receive your full company 401(k) matching contribution (if applicable), otherwise you are effectively leaving free money on the table. Funds in your Roth 401(k) may grow 100% tax-free for retirement.
—Roth IRA: If you are single, with a modified adjusted gross income of less than $138,000, you may contribute up to an after-tax maximum of $6,500 to your Roth IRA for the 2023 tax year. Funds in your Roth IRA may grow 100% tax-free for retirement.
—Health Savings Account (HSA): If you have a High-Deductible Health Plan (HDHP), you may be eligible to contribute up to a pre-tax maximum of $3,850 to a Health Savings Account (HSA) for the 2023 tax year. Contributions are made pre-tax, grow tax-free, and can be withdrawn tax-free for qualified medical expenses, making them triple tax advantaged. Because funds in your HSA may grow 100% tax-free to cover medical expenses in retirement, our clients opt not to use HSA funds for today’s medical expenses and instead treat their HSA as a long-term retirement account and invest the funds accordingly.
After making contributions to your Roth 401(k), Roth IRA and HSA, your deposits will typically be held in a money market fund (cash). To help your money grow over time, you will need to take an additional step to actually invest these funds and not leave them sitting in cash. Famed investor, Warren Buffett, recommends that investors in their 20’s select a low cost, stock index fund (stock mutual fund) such as the S&P 500 stock index as way to invest in a broadly diversified mix of businesses to grow your wealth over the long-term. For context, a one time $1,000 investment in the S&P 500 stock index made in 1957 has grown to over $659,000 today (at the time of this writing) and averaged a 10.25% annual rate of return. This illustrates the incredibly powerful combination of time and compound returns.Taxable Brokerage Account: A taxable brokerage account can give you more flexibility than retirement accounts because you can withdraw funds at any time without penalty. Consequently, liquid (taxable) brokerage accounts are excellent for short and mid-term goals that aren't retirement related, such as saving for a down payment on a home or investment property, saving up to start your own business, saving up to travel or live abroad, or saving up to help care for aging parents.
In your brokerage account, based on your risk tolerance and time horizon, you may choose to invest in different mutual funds or ETF’s that are aligned with each of your specific goals. For example, you may choose to invest in more conservative investments such as short-term Treasuries (T-Bills) or municipal bond funds for your shorter term goals, while you may choose to invest in a balanced fund (mix of stocks and bonds that may experience more ups and downs with the markets) for your mid range planning objectives.Insurance: Protect yourself from financial risks by making sure that you have the appropriate amount of insurance coverage. This may include health insurance, life insurance, disability insurance, car insurance, and homeowners or renters insurance.
Education and Skills: Invest in yourself. This could mean pursuing higher education or learning new skills to increase your earning potential. Read as much as you can and look for opportunities to increase your income, like pursuing job promotions or starting a side hustle that is related to one of your passions.
Remember that the earlier you start saving and investing, the more time your money has to grow. The power of compound interest is particularly compelling when you start in your 20s. Building wealth is a long-term process and involves regular saving and investing through all kinds of up and down markets. You may want to consider working with a financial advisor to develop a holistic financial planning and investing strategy towards achieving your specific objectives.
“What are the biggest advantages for an investor in their 20’s looking to strategically plan and build wealth?
Investors in their twenties have several distinct advantages when it comes to planning and building wealth:
Time: Time is arguably the most significant advantage for young investors. The earlier you start investing, the more time your money has to grow. This time allows for the power of compounding to work in your favor, where your earnings may generate even more earnings.
Risk Tolerance: Young investors have a long investment horizon before retirement. This means they can afford to take on more risk and invest in assets with higher expected returns, such as stocks or real estate. While these investments might be more volatile in the short term, they typically provide higher returns over the long run. Even if young investors make mistakes or suffer losses, they have a longer time to recover and recoup those losses.
Flexibility: Young investors generally have fewer financial obligations (like a mortgage or children's education costs) and hence can allocate more money towards investments. They can also adjust their investment strategy as they learn and gain more experience.
Impact of Healthy Financial Habits: Starting good financial habits in your twenties—like budgeting, saving, and investing regularly—can set the foundation for a secure financial future. The sooner these habits are established, the more beneficial they can be over the long term.
Remember, while these advantages provide a good start, successful investing requires discipline, patience, and a willingness to learn continuously.
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Joe O'Boyle is the founder and principal of O'Boyle Wealth Management, a full service financial planning and investment management firm, located in Beverly Hills, California. Joe O’Boyle was named to InvestmentNews 40 under 40 class of 2016, and has a catalog of financial planning and investing articles on Money.com & U.S. News. Disclosure information.