It might seem impossible to reach your financial goals in your 20s. After all, the typical Gen Z consumer under 24 has £8,200 (around $10,942) in debt, according to an Experian credit report. And it doesn’t get much better as you get older; the typical Millennial consumer, aged between 25 and 40, owes £20,400 (around $27,251) in debt.
However, that doesn’t mean you can’t have wealth building strategies in your 20s! As long as you make smart financial decisions, you can begin building a nest egg for a rainy day and create a secure foundation for your retirement.
Wealth Building Strategies for Your 20s, 30s, and Beyond
Building wealth strategies in your 20s can be tough, but it’s definitely achievable. Here are some key you can use throughout your 20s, 30s, and beyond:
1. Create a Spending Plan
It’s almost impossible to have wealth building strategies in your 20s without a budget. You’ve probably heard this before, but it’s worth reiterating. Here are a couple of methods you can try:
The Cash Envelope System: This is a simple and effective method. Allocate different amounts of cash to various spending categories, like groceries or entertainment. You only spend what’s physically in each envelope.
For example, if you budget £100 for a night out, you stop spending in that category once the cash runs out. This helps you stay mindful of your spending and avoid overspending. It’s a straightforward method of cutting costs and staying conscious of your spending.
Alternatively, you can use the percentage method: Allocate specific percentages of your income to different categories. For example, you might aim for:
- 20% towards savings or debt repayment
- 30% for personal spending
- 50% for essential living costs (rent, utilities, groceries)
Our top budgeting tip? Stick to your budget once it’s created. Frequent exceptions defeat the purpose. However, it’s wise to give yourself some breathing room. A super restrictive budget is likely to set you up for failure.
Feeling lost? Don’t worry! Budgets are flexible and can be tailored to your specific needs. There are numerous budgeting methods available, so find one that works best for you.
2. Invest in Your Future
One of the most powerful wealth building strategies in your 20s is retirement savings. Even though retirement might seem ages away, starting early is incredibly beneficial! Unfortunately, many people in their 20s miss out on this crucial step.
The earlier you start saving for retirement, the more time your money has to grow through compound interest. This means your money earns interest, and that interest itself starts to earn interest. It’s a powerful tool that can significantly boost your retirement savings over time.
How Much Should You Save?
While aiming for 20% of your income is a great target, it’s important to find a realistic contribution amount that works for you. Start with a manageable amount and gradually increase it as your income grows.
Getting Started:
Open a Lifetime ISA (LISA) or contribute to your workplace pension scheme (if offered) to begin building your retirement pot. The government offers a bonus on contributions to LISAs, making them a particularly attractive option for young savers. You can contribute up to £4,000 annually to a LISA, and the government will add a 25% bonus (up to £1,000 per year).
3. Boost Your Income
While saving is crucial, focusing on increasing your income in your 20s can be equally powerful. A higher income allows you to save more and reach your financial goals faster.
There are several ways to generate additional income:
Start a Side Hustle
A side hustle is a great way to supplement your main job’s income. Popular options include freelance writing, web development, or driving for a ride-hailing service like Uber.
Negotiate a Raise
If you’re performing well at your current job, consider negotiating a raise. Research your market value and be prepared to present your case to your employer.
Upskill Yourself
Invest in yourself by taking courses or certifications that could help you qualify for higher-paying jobs in your field.
The extra income from your side hustle or a raise can be directly allocated to savings or debt repayment, accelerating your wealth-building journey. Remember, every extra pound saved today has the potential to grow significantly over time thanks to compound interest.
While active income sources like side hustles are powerful, passive income can provide long-term benefits. Here are some ideas:
Build an Affiliate Website: This involves creating a website that promotes other companies’ products or services. You earn a commission for every sale generated through your unique affiliate link.
Publish an E-book: Share your knowledge and expertise by writing and selling an e-book. This can be a great way to generate ongoing income with minimal ongoing effort.
Sell Stock Photos: If you’re a talented photographer, you can sell your photos online through stock photo websites. This lets you earn royalties whenever someone licenses your images.
Building Your Asset Base
Assets are valuable items you own that can be used to build wealth. They can be physical, like property or a car, or intangible, like intellectual property. Assets are crucial for several reasons:
Debt Repayment: Assets can be used to generate funds to pay off debt, freeing up more of your income for saving and investing.
Income Generation: Some assets, like rental properties or dividend-paying stocks, can generate ongoing income streams.
Financial Security: Assets provide a financial safety net in case of emergencies or unexpected expenses.
4. Cut Back on Expenses
Having wealth building strategies in your 20s requires being honest with yourself about your spending habits. Do you really need top-of-the-range groceries or the latest tech? Probably not.
Scrutinise Your Spending
One of the most effective ways to save money is to reduce your living expenses. Here are a few ideas:
Create a Budget: A budget helps you track your income and expenses, identify areas where you can cut back, and allocate funds towards your savings goals.
Cook More at Home: Eating out regularly can be expensive. Preparing meals at home is a healthier and more affordable option.
Review Subscriptions: Audit your monthly subscriptions for unused services like expensive gym memberships or cable TV packages. Consider downgrading or canceling them if you don’t use them frequently.
Reduce Entertainment Costs: Look for free or low-cost entertainment options like visiting parks, museums with free entry days, or attending local events.
Every Pound Saved Adds Up
By making small adjustments to your lifestyle, you can free up significant amounts of money to save or invest. For example, ditching that expensive daily coffee habit could save you hundreds of pounds a year.
Transportation
Rethink your commute. Consider:
Carpooling: Share your ride to work with colleagues and split the petrol costs.
Public Transport: Many cities have excellent public transport options that can be a cost-effective way to get around.
Cycling or Walking: If feasible, cycling or walking to work is a healthy and economical option.
Further Wealth Building Strategies In Your 20s
Reduce Energy Costs: Look for ways to conserve energy at home, such as switching off lights when not in use and adjusting the thermostat.
Consider Taking in a Lodger: If you have a spare room, renting it out to a lodger can help you cover your housing costs and generate additional income.
Small Changes, Big Impact
Even a small reduction in your expenses can make a big difference over time. The money you save today can be invested and grow through compound interest, helping you build a secure financial future.
5. Consider a Financial Mentor
Having a financial mentor can be a valuable resource, especially in your 20s. A mentor can provide personalized advice tailored to your specific circumstances and goals.
Who Could Be Your Mentor?
Financial Adviser: While a qualified financial adviser can offer professional guidance, consider seeking someone with a broader range of financial experience who can share real-life lessons.
Experienced Friend or Family Member: Do you have a friend or relative who has successfully managed their finances? They can offer valuable insights based on their personal experience.
Looking at your finances from a more experienced perspective can be incredibly helpful. A mentor can help you see the bigger picture and develop a long-term financial strategy, especially if you’re new to managing your money.
Additional Resources
Beyond a mentor, consider supplementing your financial knowledge by:
Reading Personal Finance Books and Articles: There’s a wealth of personal finance resources available, covering a wide range of topics.
Taking Online Courses: Many online platforms offer personal finance courses that can teach you valuable financial skills and strategies.
By combining a mentor’s guidance with your own learning efforts, you can gain the knowledge and confidence to navigate your financial journey effectively.
6. Prioritise Debt Repayment
Debt, particularly high-interest debt like credit cards, can be a significant obstacle to building wealth in your 20s. Credit card interest rates in the UK can range from around 10% to a staggering 30%. These high charges can quickly eat away at your progress, so tackling debt should be a top priority.
Strategies for Debt Repayment
Minimum Payments: While paying the minimum amount due each month ensures you don’t default on your debt, it takes a long time to pay it off entirely due to compounding interest.
Focus on High-Interest Debt: Prioritise paying off debts with the highest interest rates first. This minimises the total amount of interest you pay overall. There are two common methods:
– Avalanche Method: Pay the minimum amount on all debts except the one with the highest interest rate. Put any extra money you have towards that high-interest debt until it’s paid off completely. Then, move on to the next highest interest rate debt and repeat the process.
– Snowball Method: This method focuses on paying off the smallest debt first, regardless of interest rate. This can provide a sense of accomplishment as you see debts disappear quickly, which can boost your motivation to continue.
Debt Consolidation
Debt consolidation can simplify your repayments by combining multiple debts into one loan with a lower interest rate. This can make it easier to manage your repayments and potentially save money on interest. However, it’s crucial to avoid running up further debt on the consolidated loan.
7. Build an Emergency Fund and Automate Your Savings
Having a healthy emergency fund is crucial for wealth building strategies in your 20s. Unexpected events like job loss, car repairs, or medical bills can happen to anyone. An emergency fund can help you cover these costs without going into debt.
Aim to save:
Enough to cover 3-6 months of living expenses. This is a good starting point, and you can adjust it based on your individual circumstances.
Automate your savings:
Set up a direct debit to transfer money from your current account to your savings account regularly. This ensures consistent saving and helps you avoid the temptation to spend that money.
High-yield Savings Accounts:
Consider a high-yield savings account to maximise your returns. While interest rates are currently low, a high-yield account will still offer a slightly better return than a traditional savings account.
Frugal Saving:
Look for ways to cut back on unnecessary expenses and free up more money to save.
8. Invest in Yourself
Having wealth building strategies in your 20s is all about investing in yourself, both professionally and personally.
Continuous Learning
Develop Your Skills: Make lifelong learning a habit. Take courses, attend workshops, or read industry publications to stay up-to-date on the latest skills and knowledge in your field.
Seek New Qualifications: Consider pursuing additional qualifications or certifications that can enhance your employability and open doors to higher-paying positions.
Networking is Key
Build Relationships: Networking is crucial. Attend industry events, connect with professionals on LinkedIn, and build relationships with colleagues. These connections can be invaluable sources of information, advice, and potential job opportunities.
Negotiate Your Worth: As you develop your skills and experience, don’t be afraid to negotiate for a raise or better employment terms. Knowing your worth and confidently advocating for yourself can significantly impact your earning potential.
Growth Leads to Opportunity
By continuously learning and expanding your skillset, you increase your value in the job market. This can lead to promotions, higher salaries, and ultimately, greater financial security.
9. Stay Motivated and Build a Support System
There will be setbacks and times when motivation dips. Here are some tips to stay on track:
Focus on Progress, Not Perfection: Don’t get discouraged by occasional slip-ups. Everyone makes mistakes. Focus on making progress over time, even if it’s in small steps.
Celebrate Your Wins: Acknowledge your achievements, no matter how small. This will help you stay motivated and keep moving forward.
The Power of Positive Influence
Surround yourself with positive influences who share your financial goals. This could be:
Supportive friends and family: Having loved ones who understand and support your financial aspirations can be a huge motivator.
Financial mentors or role models: Learning from others who have successfully built wealth can provide valuable guidance and inspiration.
Online communities: Participating in online forums or groups focused on financial planning can connect you with like-minded individuals and offer a wealth of information and support.
Building wealth is about delayed gratification. It requires discipline and focus. Here are some strategies to stay motivated:
Know Your Why: Remind yourself of your reasons for prioritising your finances. Are you saving for a house deposit, a dream holiday, or a comfortable retirement? Having clear goals keeps you focused and motivated.
Visualisation: Instead of dwelling on the sacrifices you’re making today, spend time visualising your future self. Picture yourself achieving your financial goals and enjoying the freedom and security that comes with financial stability.
Building Wealth in Your 20s
Remember, wealth is more than just a high income. It’s having enough money to cover your needs and wants, now and in the future. Here are some key strategies to get you started:
Increase Your Income: As discussed earlier, explore ways to boost your income through career advancement, side hustles, or passive income streams.
Prioritise Savings: Make saving a habit, even if it’s a small amount to start with. Increase your savings as your income grows.
Invest for the Future: Contribute to a Lifetime ISA or workplace pension scheme to benefit from compound interest and build a healthy retirement nest egg.
By following these strategies for accumulating wealth in your twenties, you can lay the groundwork for a secure and independent financial future.
In conclusion, financial freedom allows you to enjoy life on your terms, both now and in the future. By striking a balance between saving and enjoying your 20s, you can build a strong financial foundation for a fulfilling life.
