Financial Tips for People in their 20s

Time is a very essential element in building wealth. Bill Gates never made Microsoft into a billion dollar company overnight nor did Warren Buffet with Berkshire Hathaway. It took them decades to establish their companies, making them stable, and earning them billions of dollars. The same is true in building your financial foundation. You can never be financially independent overnight. It takes time, effort, knowledge, and money to build your financial nest. The earlier you start, the better your chances of achieving success.

Starting to build your financial foundation is most ideal during your 20s. When you’re in your 20s you have a source or multiple sources of income to save, invest, or use to make you earn more. Statistics show that more than 70% of people less than thirty years old of age would rather spend their income instead of using it wisely. Thus it does make sense why a lot of people continue to struggle in the rat race and fail financially later on in their lives. Here are some tips on how to effectively manage your income during your 20s.

1.) Invest in health care and insurance. Health care and insurance are very important. They will cover your financial needs in case your income generating capacity is gone either through accident or death. Health care covers hospital bills and needs while insurance normally provides financial assistance to your family or loved ones on your death or permanent disability. Several health care and insurance policies have several features bundled with them. Some offer term insurances or tied up features such as mutual funds wherein you get not just a health care or an insurance, you get to have an investment as well. There are also health care features that if the policy is unused for a specific period of time, a certain amount compounds for a specific period of time. It normally compounds from 8% to 12%.

2.) Eliminate debt and increase emergency funds. One of the reasons why people struggle financially is debt. If you have debt, you can never move forward financially. Credit cards is one of the biggest causes of debt. The interest rates compound significantly and if left unpaid, they will continue to grow. Make it a priority to settle all debt and if you have none, avoid it as much as possible. Once you’re cleared from debt, save as much as you can. Save at least 10% of your income for your emergency funds. Emergency funds serve the purpose of availability of funds in case of emergencies so you won’t resort to debt or pulling out from your investments. Once you have a health care plan, insurance plan, and a good amount of emergency fund, you will have peace of mind.

3.) Continue to learn. One of the biggest mistakes that people make is that they stop learning as soon as they graduate from college. Take note that college doesn’t teach a lot of money or finance skills so you have to develop it by yourself. Read articles, books, search the internet, or engage in entrepreneurship or investment programs and seminars to enrich your knowledge. Knowledge is very important, especially knowledge towards finances. Among the things that you should consider learning are [1] different investment and savings opportunities or channels, [2] power of compounding interest, and [3] taxation to name a few. The financial industry is a very vast field so there is no need for you to become a master of each field. Just knowing the basics of each one should be more than enough.

4.) Invest and protect your investments. Investments come in last because they should not be touched no matter what will happen. Investments are intended to grow and because of the volatility that they are facing, they are very risky short term. For young people like you, some investment opportunities that you may consider are paper assets such as stocks, mutual funds, and bonds. Paper assets doesn’t require much compared to other investments such as real estate. Once you have your investment running, protect it’s income generating capacity. For paper assets, monitor it from time to time or spend time to do some research. Paper assets are affected heavily by the market fluctuations so you must know what you are doing. Tangible assets such as businesses and real estate needs some protection through insurance.

5.) Bank deposits are not investments. Many people think that by depositing money in the bank, they are already investing. Dead wrong. Banks give a very minimum amount when it comes to interest rates. Normally, banks give 1% the most annually. So why can’t bank deposits be considered as investments when it yields more than the amount deposited? First is inflation. Inflation is the reason why money is losing it’s value. Supposing the inflation rate is 5% and you deposited to a bank for 1%, your real interest rate is -4% which means your money is losing 4% of its value every year. Second is loans. The interest rates of loans are way higher than deposits. For a deposit that earns 1%, banks give loans with interest rates of at least 4%. Quite ironic because if you loan from such bank, you are literally borrowing your own money and pay even more. Banks are ideal for emergency funds but if you intend to make your money grow, look somewhere else.

6.) Seek mentors. There is no better way to learn and seek advice than to approach experts themselves. Because of the vast coverage of the financial industry, there are several mentors on different fields. Mentors will not just teach you, they will guide you along the way and some even handle investments themselves on your behalf. Mentors and advisers come in with a price but it is all worth it because your financial portfolio will grow significantly and offset their fees.

Strategy is important in everything and if you want to retire young and rich, seriously consider building the right and solid financial foundation. A solid financial foundation will make money work for you thus sooner or later, as long as it is done right, your own money will generate income for you even without you working or doing anything. The earlier you start, the earlier you finish, the earlier you enjoy for the rest of your life