Saving Money and Building Wealth
Below are 8 of the most important things you can do to save money and build lasting wealth.
The following have been placed in order of importance for someone seeking to 1) stabilize 2) build wealth 3) avoid losses.
1: Accept that you’ll need some credit cards.
Otherwise, you’ll basically have no credit and limited access to other ways of establishing credit. Without credit, things like real estate and mortgages will basically be off limits, and things like car loans will cost you an insane amount more. Having credit cards in your name is not about needing or even using them — it’s just about playing the system.
A good credit card should offer cash back or another rewards system, allow for high limits, have no annual fees, and low interest rates. An example (at the time of writing) is the Discover It Secured Card, which offers 2% cash back and matches your credit limit to an initial deposit up to $2500.
Even if you only charge a single meal for $20 and pay it before it’s due every month, this will help you build great credit. Good credit will save you tens of thousands of dollars on things like house buyer closing costs and car loan insurance over the course of your life, so this is the number one thing to do for your financial future.
2: Avoid consumer debt.
Consumer debt is debt that doesn’t make you money. Debt used incorrectly can destroy your life. Only buy things you can afford when you can afford them.
It’s okay to use credit in an absolute emergency. If your car dies and you can’t work without it, that’s an emergency. Wanting a new pair of shoes, a nice steak, or a bigger TV is not an emergency. If you want those things, you have to learn to delay gratification, save up for them, and buy them when you have the cash in hand.
You’ll find that incentivizing saving this way will make you more intelligently evaluate any potential purchases, and in the end, you’ll decide against a lot of useless things you’d have otherwise just bought on impulse and never used.
Consider the utility in your purchases. Buying a coffee maker so you can spend 50 cents on your morning brew instead of $5 at Starbucks is a good life investment. Buying a bigger TV you don’t really need (and that’s probably going to use more electricity) isn’t a good purchase.
3: Live below your means.
Living below their means is a personality trait of everyone who has ever built lasting wealth. Whatever you make, you need to live on significantly less. Most things won’t make as much of a positive long-term impact on your life as just saving and investing. Living cheaply in your 20s will set you up forever.
$5000 invested around age 20 at the stock market’s standard 8% annual return will yield over $125,000 by age 60. Compare this to the same $5000 invested at age 30 yielding only $50,000. The party animal and shopaholic spending their way through their 20s will have a much more massive hurdle to wealth than someone who was frugal early.
By the time most of us understand finance enough to have this knowledge, it’s too late to do anything about it. If you’re already too old to start investing in your 20s, the second best time to start is right now.
4: Have a bank account solely in your name.
This is by far the easiest thing to do on this list. This shows potential lenders and other agencies that you’re an independent adult. However, this isn’t about opening an account “just anywhere” simply to have one.
A good bank account should have no minimum balance requirement, no monthly maintenance fees, and no “BS” fees like having to pay $40 to order checks.
Don’t be afraid to bank online. Online banks like Ally Bank are fantastic. At the time of writing, their savings account pays 1.9% interest, you can order as many checks as you want for free, and they offer debit card services.
It might sound counterintuitive, but for brick and mortar banks, you could have a more difficult time finding good service. Some of them, like Bank of America, offer people 25 and under (and students) all services for free. Sometimes you can also get interest-free credit cards if you fall into this category.
Just be aware that you may want to shop around for new services later as you fall out of the under-25 or student categories. Once you cease to qualify, you might have to maintain a $1500+ balance, or be surprised by high interest rates. Read all the fine print and be ready to go elsewhere.
Also keep in mind local banks and credit unions. They usually offer no-fees services as well as having better in-person customer service.
No matter who you go with, the most important thing is to make sure there are no monthly fees or minimum balances.
5: Open a Roth IRA.
This is a retirement account for “post-tax” money. That means you should invest money you’ve already paid taxes on there, which is going to be almost any money you get from a normal hourly/salary job.
The reason to go for a Roth IRA is that at age 59 ½, all profit from your investments within this portfolio are yours to keep tax free. Therefore, it’s best to start investing as early and as much as you can within a Roth IRA.
Let’s say you buy some stocks and they go up in value. When you cash out, you have to pay capital gains taxes on those profits. If you invest in the same stocks through your Roth IRA and they go up, when you cash out, you’ll owe nothing on those gains. This could increase your profit margins by more than 20% depending on your tax bracket and stock types.
It requires you to hold onto investments longer, but lets you invest (and gain more from those investments) regardless of your tax bracket. That makes this even better for people who aren’t making a killing. Invest as much as you can as early as you can and let the interest and return on investments compound.
Because of the tax-free status, this is also a great place to invest in things like real-estate indexes which otherwise would have very high tax rates on dividends.
You can only invest up to $6000 a year into a Roth IRA. If that seems like more than you could possibly invest in a year right now — that’s great! It means a Roth IRA is perfect for you because ALL of your invested money will grow tax free.
And if you’ll be able to invest way more than $6K a year — that’s great! But make sure to max out the Roth IRA first.
Remember, $5000 invested at age 30, given an average market return of a compounding 8% per year, will yield over $50,000 by the time you’re ready to pull it out of the Roth IRA around age 60. And if you’re a real go-getter and still young, that same $5000 invested when you’re 18 and compounding until you’re 60 will yield almost $127,000 by retirement — all tax free.
Some great places to consider opening a Roth IRA are companies like Vanguard or Fidelity. Big brick and mortar banks might also be able to offer this service.
6: Get a(nother) job.
Get a job or create a “side-hustle” even if you don’t need it. It doesn’t matter what it is or if the pay isn’t great. Do anything, even if it’s just a few hours a week, for extra investment money. If you’re investing in your 20s, a rough mental note to keep is that every $1 you invest now is $15–25 in future growth.
The same goes for spending. That $5 Starbucks coffee we just talked about might not seem like much right now, but consider it the same as burning at least $75 from your retirement account. No matter how much you love caramel macchiato, it’s not worth $75.
So do what you can to save a little extra now and make your future that much more secure, whether you’re trading stuff on eBay, selling things on etsy, or just doing some good old-fashioned burger-flipping.
View this as an opportunity to get inside the heads of others. Figure out how businesses are run, how supply chains operate, how customer service should be conducted, and most importantly, how all these things operate on a budget.
7: Learn how to invest for the long run.
It might be tempting to chase the latest buzz on the streets. You see Tesla go parabolic, Amazon’s monopoly seems like it can never fail, and that weird guy from high school is posting pictures of the car he (allegedly) bought with Bitcoin money.
You can certainly gamble on things like that when you’re stable, but understand it is gambling. Your priority, even before growing your wealth, is protecting your wealth.
You should be investing in stock indexes consistently and planning to hold them for 20–40 years. There are all different kinds of indexes, the most famous being things like the S&P 500. One of the most popular indexes at the time of writing is SPY. Other examples are things like FZROX, VTSAX, and VFIAX.
There are indexes for the overall stock market, real estate, technology companies, and so on. These indexes automatically adjust to drop unprofitable companies and replace them with more profitable ones so you, the investor, don’t have to do too much thinking or researching.
Bonus: Don’t forget you can also invest in yourself!
Investing doesn’t just mean corporate giants. If you want to take a risk, it’s best to risk young. If you want to start something like a Twitch channel or small business, try to do it early and give yourself a reasonable time limit. Decide something like, “Okay, I’m going to give this YouTube venture two years, and if it fails, then at least I gave it my all and don’t have to wonder about what could have been.”
It’s better to lose a small amount in your early 20s than a big amount when you’re 40. Failing when you’re single and living in a flat with a couple roommates while you work part time doesn’t matter as much as failing when you’re married and have two kids and a mortgage.
Plus, if you’re successful, the money you make from the venture will have those extra 20 years to compound and grow through investments, so someday you can afford that $75 caramel macchiato.
8: Reconsider college.
Saying this as a former teacher doesn’t get me many points in the education community, but I’ll keep saying it: college isn’t for everyone.
In the pre-Millennial age, college was cheaper and more exclusive, so it practically guaranteed a higher paying job and greater wealth. We can hardly blame previous generations for pushing college so aggressively since they saw huge rewards (or saw how they missed out on those rewards while others reaped them).
These days, college is wildly expensive and in many cases generates nothing but unnecessary debt throughout those key investment years in your 20s. Imagine investing $100,000 by age 25 instead of having that same amount in debt. It’s enough for anyone to retire a millionaire (about a ~$1.5M millionaire, to be exact).
If you don’t know if college is for you, consider taking a gap year or two to work and reflect on what you want to be doing with your life. This will give you time to save and invest whether you decide to go to college or not. It will also give you time to reflect on your education and what you really want (and don’t want) to do.
Lots of people rush into college only to change their major ten times and waste tons of time and money. The added maturity of a couple years will also go a long way toward self-discipline in money management if you do have to take out loans.
If your career path is unclear, consider a local school like a community college that offers a two year associate’s degree. If you can’t decide what you want to do or realize school isn’t for you, you can finish that two year degree instead of walking away completely empty-handed.
Also consider trade or technical schools, which are great for jobs that have fantastic pay but don’t require degrees, like working with HVAC or welding.
Only commit to a four year degree if you are absolutely sure of what you want to do and you NEED the degree to do it (like becoming a teacher or doctor). Otherwise, unless you have some kind of bright-flight scholarship or your parents are paying for your schooling, take some time off and reconsider your options.