The idea for this post came whizzing into my brain as I was talking with a 24-year-old recently.  He bluntly said to me:

“My financial stress is sending me into a bad fight with depression, and I just need someone who can help me figure everything out.”

I could tell he was open-minded, hungry to learn, and employed in a good job.  Those are the raw ingredients to success.  He just needed encouragement, from someone who has been in his shoes and actually turned those raw ingredients into a healthy and happy financial life.  So I decided to write this post about the decisions my wife and I made in our 20’s to set ourselves up for financial success in our 30’s.

The first piece of advice I’d give any 20-something is a quote that shaped that era of my life more than anything else.  The quote read, “Your 20’s are for finding yourself.  Your 30’s are for executing what you’ve found.”  So I told this 24-year-old, don’t stress out about where you are right now.  Your 20’s are for figuring things out and finding yourself.  Your 30’s are for executing the visions that you find.  I said, “If I were you, I’d start with the goal of using your 20’s to set your 30’s up for an incredible decade and beyond. Now, let’s discuss the actual steps I’d take to transform your life into an incredible adventure in your 30’s:

How to set yourself up for financial success in your 20’s:

STEP #1: Lower your expenses and save $1000 in cash.

The first step is to lower your expenses, so you can put yourself in a position to start saving.  Don’t think too hard about it.  Just avoid spending money.  Drink out of a drinking fountain rather than buying  a soda.   Skip the bar and the expensive retail drinks.  Instead ask a good friend, or date interest, to go out on a long walk through a park and buy a cheap bottle of wine if that’s your thing.  Ride a bike rather than drive a car.  Buy food off the $1 menu, rather than sitting down at a restaurant for a $20 meal.  Ditch the new expensive car, and buy the reliable commuter car that will last 200,000+ miles like my 2004 Toyota Camry.  Be smart.  Get creative.  Be aggressive.  Your life is at stake.  The lower you can get your expenses, and the more you can earn, means the more you can save.  And saving is the path to total freedom over what you want to do with your life.  The faster you can start climbing out of financial hell, the faster you can start finding the peace you’re searching for.  Do everything you can to avoid spending money, so that you can start saving money, and escape the financial stress bringing you down.

Once you can start saving money (even if it’s just $10 a month), immediately start building an emergency fund of $1,000 in a checking or savings account.  That $1,000 will allow you a financial cushion to sit on and just take a deep breath and feel good about yourself.  That $1000 in the bank will allow you to stop making reactionary decisions toward all of the unexpected things that happen in life.  It will allow you to start being focused, disciplined, and deliberate with all of the long-term decisions that will guide you toward creating a life you want to live.

STEP #2:  Save $3,000+ and create an investment income stream with a money market account.

Build your $1000 emergency fund into $3000, and then open a money market account making 2%+ interest.  This is the one I prefer:  Vanguard’s Prime Money Market Fund.  (More reading on investing your emergency fund here.)

The goal of this step is simple:  Save 3-6 months of expenses in this account to further protect you from the harsh realities of life, and then start paying off high-interest debt.  Here is a great chart that our friend, Financial Samurai, put together showing what percentage of your savings should go to debt-payoff, and into savings/investment.

You will really start sleeping like a baby with a fully-funded emergency fund in place.  Now you have protection against all of the unexpected life disasters that used to steal all of our money and trigger a state of depression. Another benefit of investing your emergency fund into VMMXX, is that you will now start building a new income investment stream.  That $3,000 will now start paying you interest even when you’re not at work.  2% of $3,000 is $60 a year, or $5 a month.  That doesn’t sound like a ton, but you’ll never be able to take the next steps and make $1,000 of investment income a month until you can make that first $5 a month.  Opening up a money market account is a great place to start learning how to invest, and building a second income stream away from your job.

Step #3: Max Retirement Accounts. (IRA, ROTH IRA, 401K, SEP IRA, ETC.) 

Savvy, long-term, money masters will then start maxing out their available retirement accounts with low fee index funds (here’s 3) as soon as possible.  Max these NOT just for the hope of one day reaching retirement, but to protect as much of your money as you can from unnecessary erosion like taxes and inflation.  You can always access your retirement money early if you need to, and if you don’t, it’ll just sit there and grow tax-free into enormous sums over the decades.  At the bare minimum, investing enough into your retirement accounts so that you get your employer’s match.  That’s free money.  Don’t miss it.  Take advantage of as much money as you can.

Step #4:  Invest remaining money into index funds, or real-estate, or both.

By the time you get to this final step, you should have the basics of saving, money management, and investing figured out.  So now keep cutting your expenses, and push yourself to accomplish the financial goals you never thought you’d be able to accomplish:  Like owning a home, buying stocks, managing investment properties, and retiring early from the rat race to live the life you’ve always dreamed of.

There’s really only one stock fund you need to buy if you want to invest in stocks above and beyond your retirement accounts:  It’s called Vanguards Total Stock Market Index Fund, or VTSAX (Minimum $10,000 investment for the lowest fees, or VTSMX with a minimum investment of $3,000.  VTSMX is the same fund, VTSAX just has lower expense ratios attributed to it.

Investing in these is simple:  Just open a fund, buy some shares, and keep throwing your extra money in here like it’s coal and your running a steam-engine money printing machine, and let your money start working for you.  VTSAX tracks the entire US Stock Market, so it’s already diversified, cheap to buy, and has a long track record of success.  (Averaging around 7% return from inception.)

REAL-ESTATE: (Primary and Investment Properties) 

At the same time while doing all of the above, if you want to buy, or invest in, real estate for a primary residence do it.  But only if the following three things are true:

#1) You’re ready to live, or own, that house for the next 5 years. It takes between 3-5 years to break even on all of the costs associated with buying a house.  So if you only plan on living in an area for a year or two, or are unsure, run as fast as you can away from a realtor and RENT until you are ready to own something for 3-5 years at a minimum.

#2) Your mortgage on the property you want to buy, will be LESS than 30% of your annual salary. Bonus points if it’s closer to 10-15% of your annual salary, and you have a 20% down payment, so the property doesn’t make you “house poor.”

#3) You want to try owning real-estate, and are open to all the work and extra costs that come with it.  If you dream of trying something, there’s no better way to learn than jumping in the deep end and learning to swim as you go.

If you can check off this list of things to do when buying a house, then by all means, try buying a house and see if you like it.  When I bought my first house, I had no idea what I was doing or if I’d like all the maintance projects I knew would come up.  It turns out, I discovered I love owning my home.  Maintence isn’t a drag.  Little improvement projects are a fun way for me to build value, save money, and make my house worth more.  In fact, I found I love owning real-estate so much, we bought our first investment property last year and I am building a real-estate business on the side.  I never would have learned these things about myself unless I tried buying my first home.

Once you’ve mastered these four steps: 

1) Cut expenses and save $1000 cash. 

2) Build a 3-6 month emergency fund in a money market account. 

3) Max your retirement accounts. 

4) Invest in the stock market and real-estate with your surplus cash.  

Just repeat these steps over and over again, and watch your net-worth grow from $1,000; to $10,000, to $100,000, and $1,000,000 over the next few decades.  It really is that easy.

DISCLAIMER:  I know these numbers can sound ridiculous and huge when you’re a young person just starting out and struggling to get by.  But once you get going, these numbers start compounding and can happen faster than you think.

For example, 6 years ago my wife and I had a net-worth of $0.  We’ve never made a 6-figure income in our lives.  We just focused on accomplishing all of the exact steps I outlined above.  We cut ALL unnecessary expenses first, so we could save.  Once we started saving, we learned how to invest.  We just did this over and over and over again, and now six years later we own 2 homes, and have a six figure stock portfolio.  You can do it too.  The only way you CAN’T do it is if you choose not to.

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