If you’re reading this in your 20’s, you are on a path that many of us envy–the chance to start working towards FI with time on your side! You may be coming to the FI path at this age after getting into loads of student loan debt, or, you may be starting your journey at a fabulous $0 net worth with no debt whatsoever.
No matter where you’re at, your first goal will be to trim expenses and work on getting as much margin in your budget as possible to either a.) pay down your debt or b.) start getting assets to save and invest.
Working Towards Zero: Getting Out Of Debt
If you’re looking down the tunnel of a large multi-zero amount of student loan debt, your first course of action will be to trim the fat in your budget and work on getting your loans or any consumer debts paid off as quickly as possible.
While you’re working towards paying off your debt, it would be wise to also put some money aside to cover emergency expenses. If you are fortunate enough to have an employer-sponsored retirement plan, make sure you’re contributing enough to take advantage of a match.
Taking on a side hustle, sticking with a roommate, and avoiding the temptation of “lifestyle inflation” will help you keep costs low and enable you to put as much money as possible towards your debt.
After Zero: Keep Your Costs Low
If you’re at $0 net worth (trust us, that zero is super beautiful!), and thus, debt free, you’ll want to keep costs low and start investing towards your FI plan as quickly as possible. Even though it is challenging to know what your life could be like in 5 or 50 years–how big your family will be, what career you’ll be happy within a decade, or even where you’ll want to live; finances and financial issues will be apart of the equation.
While you’re figuring things out, you can still have a high savings rate by putting any extra cash in a savings or checking account until you’re ready to invest in some index funds. Put cash in accounts that fit your risk tolerance and keep your options flexible. At this age, as with any age, you’ll want to watch expenses that creep in.
After You’ve Got Cash To Spare: Invest
After a few months of keeping expenses low and putting as much cash aside as you can, you’ll wonder what to do next.
If you ask an “old person” their biggest money regret they will likely tell you it was not starting investing earlier. In your 20s you have an amazing opportunity that us old folks would kill to have again. Time.
Consider this, every $100 you invest at age 25 will be worth about $4,500 at age 65, assuming a 10% annual return.
Compare that to investing at age 45; where that same $100 invested at 45 will only be worth $670 at age 65, assuming the same 10% returns.
That's a huge difference!
So where to start? Broad-based low-cost index funds, such as VTSAX, are a great bet. They track the whole stock market for very low costs. This gives you a great opportunity to build wealth.
Additionally, you’ll want to ensure you are getting any employer match you can if you have access to an employer-sponsored retirement plan, such as a 401k. It is also advantageous to opt into any stock options or added employee perks when offered. Even if you’re not a super high earner at this age, do your best to live frugally so you can take full advantage of your extended timelines and horizons.
Building Credit To Hack Later
At this stage, you might be really excited to start traveling with travel rewards, but don’t have the credit score needed to rack up some of the best cards. Your first order of business will be to get a decent card with good benefits and establish a credit history. Keep your credit use ratio accounts for 30% of your credit limit (meaning if you have a $1,000 credit limit, you’re only carrying about $300 of debt for that billing cycle) and pay off your card each month.
The Capital One Quicksilver One Cash Rewards Credit Card is a good place to start, as it offers cash back but doesn't require an excellent credit rating.
There are many factors that go into your credit score–including usage, length of credit history, and open accounts. Now is a great time to learn about credit and build credit along the way. If travel rewards are in your future, you can also use this time to start saving $1 a day for your next big trip to cover food and anything you can’t book on points.
The FI path is more than just saving money, it is living life in a more intentional and balanced way. It is easy to be caught up with next new thing or think you will start saving when you get a “real career”, but the amazing thing for someone in their 20's is that you have options, opportunities, and freedom to choose what you want your future to look like, and to work towards it.