Four Financial Steps For Your Twenties
From time to time, we all wonder how our lives might look if we had made different choices at pivotal moments.
Since this is a personal finance blog, I’ll spare you the commentary on deeper questions about relationships but given the numerous financial decisions we make cumulatively each day, week, month, and year the way we handle our money provides plenty of opportunity to second guess.
In that spirit, this is the first of two posts I’m writing regarding the two most significant financial decades of my life thus far: my 20s and 30s.
In no particular order, here are four thoughts I would emphasize to myself if I could step back in time and provide a little financial direction to a 20-year-old me.
1) Dodge Debt
The twenties are a difficult time in life to avoid debt. There are probably more temptations to assume debt in one’s twenties than at any other point in life.
I’m not saying “more debt” in terms of the amount of debt, just more stuff that you could borrow money for.
For example, in your 20s you’re more likely to need help funding your education, housing, and automobiles, not to mention purely consumer-based spending.
And all of this is happening at a point in your life when you probably know less about consumer debt than you will for the remainder of your life while credit companies, banks, and car manufacturers all simultaneously provide incredibly persuasive arguments suggesting debt is the quick and easy solution to all of your financial problems.
It’s akin to a girl scout selling cookies outside of a weight-loss clinic. So cruel.
And I’m not even going to claim that all debt is bad. To an extent, debt on appreciating assets like an education or a home is actually quite useful.
But that’s also what makes it so challenging, particularly in the impressionable 20s, to understand just where the line is that distinguishes between “good” and “bad” debt.
Let’s give it a go, shall we?
First off, I would tell myself or any 20-year-old to avoid debt on depreciating assets like cars and consumer goods altogether.
Depreciating assets lose value over time. This is true of most of the things we buy. Cars, bikes, groceries, furniture, clothes, utilities, and much more all amount to little or nothing of value when we’re done using them.
In other words, these items contribute very little to our overall net worth meaning they do very little to make us wealthier.
In fact, they have the opposite effect.
Which is why borrowing money for these items only adds insult to injury by further enhancing the negative effect they place on our net worth through additional interest.
Some of you may follow me on many consumer items, but taking a debt-free position on the purchase of a car is certainly not a mainstream point of view.
I get it. It’s unusual, but so is being wealthy.
Instead of explaining to you why I don’t borrow money for cars, may I suggest that you read this post and watch this video, both of which explain the true cost of this type of debt.
Furthermore, I want to point out that I’m not totally against using credit cards assuming you pay off the balance completely each month.
Used this way, credit cards are a helpful way to earn cash back for purchases or other perks like airline miles or gift cards to retailers and restaurants you may frequent.
But don’t dare let the amount you owe on a credit card roll over from one month to the next. Interest rates for credit card balances are among the highest of all types of consumer debt.
2) Invest ASAP
There are two key ingredients for building wealth through investing: money and time.
The amount of money one invests is dependent on a variety of factors which I won’t address here.
Time, on the other hand, is constant for all of us. It comes and goes at the same rate. We can’t buy more of it. We just have to use it as efficiently as possible.
And what’s the most efficient way to use time as an investor? To keep your money invested as long as possible.
There is no substitute or shortcut for time in the market.
Could you potentially place a big bet on a single investment that hits a bull run or sees a sudden surge in its value? Sure. But you’re almost as likely to lose money with such an investing “strategy”.
In fact, a while back I ran a comparison of short-term stock ownership to taking your chances at a casino and showed how short-term investing really isn’t much different than gambling.
Long-term investing, on the other hand, has consistently produced meaningful benefits for investors for over a century.
While I could never guarantee that investing in anything over any period of time will generate a superior rate of return, I can say that, historically, broadly diversified portfolios of stocks have produced the best returns relative to their level of risk.
In other words, if you have a lot of time to invest, a diversified basket of stocks is a great way to go.
And just how much difference does time make?
Well, here’s a table illustrating the value of a dollar invested in an S&P500 index fund over a period of 1 to 50 years.
So, a dollar invested in an S&P500 index fund could be worth 7.6 times its value in 20 years, almost 21 times its value in 30 years, and nearly 160 times its value in 50 years.
And here’s the key: the longer the investment stays invested, the higher the returns grow.
Just look at year 25 versus year 50. In double the time, the return grows another 12.6 times its 25-year value.
The lesson here is compounding interest rewards the patient.
Personally, I didn’t have much opportunity to invest prior to my 20s. Like I said earlier, there are two ingredients for building wealth through investing. I had time, but not any money.
Generally speaking, our 20s are when we start our careers and begin establishing habits financially that will stay with us for decades to come.
That’s why it’s so critical that make investing a priority and start as early as we can.
Yes, you can start later and still retire one day, but the longer you wait the tougher is to substitute for lost time.
3) Don’t Buy THAT House
I live in a relatively low-cost-of-living area.
When my wife and I were first married, we never considered not buying a house. It was so much easier to buy one at that time than it is today.
For some reason, I convinced myself that we should buy a house that we could stay in for a very long time.
It’s a bit fuzzy, but I think my reasoning was that even though the initial purchasing costs of a home are high, the longer you own the home the more time you give market appreciation to offset those costs and justify the investment.
That all sounds great, but here’s the thing; these facts are not strongly correlated to the size of the home you buy.
My wife and I had planned to have kids eventually, but we both knew we were going to wait several years before enlarging our family.
As it turned out, we lived in, maintained, heated, cooled, insured, and paid taxes on a 2600-square-foot house for 7 years before our son joined us in 2012.
In hindsight, it would have been more efficient to just buy a smaller house and upgrade about the time we started having kids.
To add insult to injury, we moved a few years after he was born to get into a different school system. This all would have probably been easier had we just bought something a little more appropriate in the first place.
As you buy a home, try to think 5-7 years ahead. Any less than that and you’ll forfeit quite a bit of cash in the buying and closing process. Any longer and you run the risk of finding that your needs have changed significantly in that time.
4) Use Time Wisely
When I was in high school, I thought I was busy until I got to college.
When I was in college, I thought I was busy until I graduated and got a job. (Come to think of it, the first few years of work may not have been as busy as college.)
When I was getting going in my career, I thought I was busy until I started grad school at night.
When I was in grad school, I thought I was busy until I had a kid.
Since then, it has only gotten busier as the demands of family and work ratchet up the intensity year after year.
Most of my peers share a similar story. In fact, it sounds like this is the way it’s going to be until the kids grow up and begin driving themselves to their various activities and social gatherings.
It’s not that I really expect you to care how busy my life is, but it does serve as a convenient example of how “busy” we always seem to feel until the next stage of life circumstances arrives serving up a fresh dish of naivety.
The truth is even though I felt busy in years past, there was time for other, more beneficial activities.
I’ve already explained that I was married for seven years before my first child was born. My career began a full year prior to that, so I had eight years between college and the life-altering arrival of parenthood.
I used two of them well to further my education, but I wish I had used the other six more wisely as well.
This blog and YouTube channel are a perfect example. If I could go back in time, there’s little doubt I would have started working on these projects then instead of waiting until I was 40 and have less time to benefit from them.
So, what could you be doing?
Is there an opportunity for you to pursue something educationally or professionally? Are you working your life away and need to step back a bit to enjoy life more? Is there an interest you have that you could elevate into a business or use to benefit others as an organization of some sort?
If you have the time, lean into these questions.
Also, in my examples I listed parenthood as the major game-changer for me in terms of time availability, and it is. If you have kids, you know, and if you’re going to have kids, you will.
The truth is there are many different things that can limit or reduce the marginal time you have available.
The overall point I’m trying to make is to be sure that the time you have is being used in a way that brings the highest possible degree of utility for you. Don’t waste it completely on Xbox and Netflix, though I suppose they both have their place.
Conclusion
The 20s are probably the most impactful years of your life from a financial point of view. The good news is you’ll have plenty of time to correct mistakes made during this decade and the things you do well will reverberate with positive side effects for decades to come.
On the other hand, you’ll never have this much potential for your time again. Be sure to use it as wisely as possible.
