The path to building wealth has never been easier but so has the path to financial ruin. The digital age has brought us a burst of online payment systems, buy now-pay later apps, and so many other financial tools that have led young people into poor financial habits that ultimately punish us. The bright side: it has also given us some incredible financial tools to build and sustain wealth!
Financial pressures, high-cost of living, and oppressive debt lead many young people to struggle financially in the first few decades of their lives. But remember, time is your friend, and the path to financial freedom is purchased with your time, consistent habits, and responsible money management. So here are my 5 steps for building financial stability in your life- and no, crypto investing is not going to be one of them 🙂
Step 1: Open a Roth IRA and contribute to it as early as possible
Roth IRA’s are an amazing financial tool for building long-term wealth with little risk and great tax-advantages! Roth IRA’s are an individual retirement account that enables you to contribute “post-tax” money that can later be withdrawn tax-free (after you turn 59 ½). Unlike your traditional savings account, when you contribute money to your Roth IRA, you have the opportunity to buy stocks or mutual funds that can grow your assets far more substantially than if you were just throwing them into your bank account. To test this, I used a Roth IRA calculator: assuming a 9% return and investing $200 a month, you would have $1 million by the time you turn 65 years old. That is called the magic of compound interest.Â
If you are interested in opening a Roth IRA, consider starting with a Fidelity or Vanguard account. They’re entirely free to open and offer great tools for beginner investors!
Step 2: Live on less than you make
While simple, this may be the hardest step for most people to incorporate into their daily habits. I know many people who make more than $100,000 a year who have worse spending and saving habits than some of my friends who only make $40,000 a year. If you want to live on less than you make, you need “to make a budget” and “stick to it.” My recommendation: create a simple excel sheet with all of your monthly expenses (car payments, rent, utilities, groceries, subscriptions), and then subtract these from your monthly income. If you end up in the negative, then you’ve got a problem.
A great rule of thumb is to spend 50% of your income on needs (housing, utilities, groceries, etc.), 20% on investments/savings, and 30% on social outings, experiences, and other wants. It’s not rocket science, but it does take consistency and responsibility to build wealth.
Lesson 3: Open a high-yield savings account
I recently opened a high-yield savings account, and this is a fantastic tool to have in your backpocket. By simply contributing $50 a month to this account, you will have a great slush fund for whenever life decides to hit you with a left hook (car repair, hospital bill, etc). Plus, your money can compound by 3-4% annually if you open the right account, and you’ll make far more money than if you were to keep it in a standard checking account.
Lesson 4: Pay off your credit card bill every single month
One of the leading causes of financial stress amongst younger Americans is credit card debt. The concept of immediate gratification without needing to pay off your purchases instantly is undeniably appealing, but it can entrap many who are not careful with how much they spend. Even worse: apps like DoorDash now have options for “buy now, pay later” purchasing systems which will further exacerbate these issues.
So why should you care about building a good credit score? Here’s why: by building a reliable credit score, you will have easier access to loans and credit since lenders will see you already have a reliable history of paying off your credit card bill each month. This will come in handy when you inevitably need to get a home mortgage or an auto loan. More importantly, you will also have a better grip on your spending habits and avoid adding any more debt to your
Lesson 5: Redefine your mindset about money: your future self will thank you
While less practical, it is tremendously important to remember that the small decisions you make today have an impact on your future self whether you know it or not. By choosing to make deliberate choices today to invest in your financial future, you will look back in time and be grateful for the small sacrifices you made today. Most people will not choose to make these choices simply because they are difficult. But most rewarding things in life are at the expense of some degree of pain and sacrifice. The good news for everyone out there is that time is your greatest ally. So, go out there and start building a better financial future for yourself!