In 1926, a man by the name of George Clason wrote a book, The Richest Man in Babylon. It’s a parable set in ancient Babylon. The richest man is asked by his friend, Bansir, how he came to be so wealthy while Bansir, who works just as hard cannot seem to make ends meet and the live the life of luxury that his wife would like. The richest man then begins to reveal his secrets to wealth. Three of his “rules” apply to 20-somethings today as much as they did back then and throughout history.
1. Pay yourself first. From every paycheck, 10% is taken and paid to yourself. This is not for spending. It is for saving and investing.
2. Put that 10% into something that will pay you a return on your money.
3. Live below your means so you stay out of debt.
If you are serious about building wealth, you need a plan. The first step might just be to write your goals with these three “rules” in mind. Do it as fast as possible, imagine you are an urgent essay writing service.
Beyond the Rules – Early Investing
Now that you have the three “rules” for wealth-building, it’s time to put them into the practical reality of your situation. If you are 20-something and thinking about investing, that’s a great start. It means that you want to take a part of your income and put it away for your future – hoorah! But investing is based upon each person’s individual circumstances. Here are where most young adults in their 20’s find themselves.
1. They have a decent salary and a job with an established company. There is a 401K with a match from the employer. If this is you, then put as much as possible into that 401K to get the maximum match, and even beyond if you can afford it. The employer match is free money to you, and your share is taken out before your income is taxed.
2. They have a job but there is no 401K matching plan at work. If there is a 401K without a match, the best bet is to still put as much as possible into it. If there is no 401K at all, the best option is to open a Roth IRA and have the money automatically taken from the checking account.
3. They have a job but a bucket-load of student loan debt and, with other expenses, have very little to invest at all. They see no point if they only have $50 a month – it’s just too little. Nothing could be further from the truth. The best advice is as follows:
- Take a good long look at your budget and come up with a reasonable amount that you can set aside for investing.
- Find a brokerage that has a very low minimum and open an account. Have automatic payment set up for the monthly amount you determined. You don’t have to select the stocks – your account is managed for you.
- Every $1 you save in your 20’s is less you will have to worry about in your 50’s – remember that.
The Debt Devil
Other than a mortgage (if you have already purchased a home), student loans, and a car payment, you should not have other debt. Even car debt is not “good debt,” but it is often unavoidable.
The problem with credit card debt is that the interest you pay will be horrific, and the monthly payments you are making could be going into your 401K or something else. If you are in debt right now, you have to get rid of it as soon as possible:
- Moonlight in some way to make extra cash. Tutor kids, repair computers, give piano lessons, be a ghostwriter – get a gig, the income from which you will only use to pay down that debt.
- When you get a raise, don’t change your lifestyle – the extra money goes toward the debt until it is wiped out.
Beyond the 401K
If you have maxed out what you can put in your 401K (what a great problem to have), your debt is paid off, and you have additional money to invest, here are good options:
1. Open a Roth IRA. This is a great investment strategy. The money is taxed before it goes in, but here is the pot of gold. Any money that your Roth earns over its lifetime is not taxable. When you start pulling money out as a retiree, no income tax or capital gains tax will ever be paid. Most large brokerages houses have Roth IRA accounts
2. Another option is to invest in a mutual fund. Again, reputable brokerage firms, like Vanguard, have no-load (no up-front fee to set up an account) funds with a variety of risk levels. If you use Vanguard, you can get on its site, take a survey, and find out how much risk you can handle. Then, funds with that amount of risk will be presented for you to choose.
3. Individual Stocks: Unless you have lots of time to study the market, this is not a wise choice. If you do invest in stocks on your own, never invest any money that you cannot afford to lose. Then if a failure happens, you are not in a panic about it.
Keep it Simple
You have a career, a social life, you are young and want to enjoy these years. If you have to spend time managing your investments, watching the market for times to buy and sell, you can end up spending a lot of your spare time in this activity, making a lot of mistakes, and losing sleep at night. Invest in accounts and funds that are managed by people who do this for a living. Glance at your quarterly reports and don’t panic when there is a market downturn. This is the biggest secret to find yourself loving your retirement years.