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8 ways to prepare in your twenties for financial freedom

April 6, 2020

Here we tell you how to free yourself from debt.

8 min read

The opinions expressed by collaborators are personal.

8 ways to prepare in your twenties for financial freedom8 ways to prepare in your twenties for financial freedom

The twenties are a time to enjoy the freedom that you will only experience again after you retire. They are also the ideal age to invest, because you have time in your favor and you can enjoy the magic of compound interest.

Over the years, I have created a millionaire business and have made heavy investments with significant benefits. But doing the right move in my twenties saved me from headaches and frustration – and it can do it for you, too.

There is a saying: “The one who risks more, wins more.”

Here are eight financial principles that you can start practicing in your twenties to prepare for long-term success.

1. Understand compound interest and valuation

A concept that generally goes unnoticed when making long-term financial decisions is the impact and concept of inflation. My parents always told me to save at least 10% of my salary for my retirement. Saving a little today can be a great benefit in the future thanks to compound interest. But keep in mind that compound interest is a double-edged sword: A small debt can become a huge debt in the future.

Also, you should try to make financial decisions based on valuation . Buying a home is not always a bad decision. In fact, a study from Harvard University showed that homeowners have better assets than those who rent. On the other hand, investing in the stock market at higher valuations is not a good decision. You should focus on investing in assets that are available at an attractive valuation.

2. Generate passive income

The faster you can put your money to work and make a profit while you sleep, the faster you can enjoy the life of your dreams, reduce stress, and even live longer. This point is difficult to digest especially for those who earn more money. Each peso that you gain in a passive way is worth ten times more than the one that you gain working. When you generate passive income, you create the best form of financial freedom. Your time on earth is limited, and it is important to find ways to ensure you maximize your earnings while minimizing your work time.

3. Avoid getting into debt

Whether it's through credit cards or college loans, try to make smart decisions when you borrow money. Borrowing money using credit cards, labor loans, and short-term bank loans can lock you into a circle of debt that seems impossible to get out of. These types of debts come with a high interest rate, so you should avoid them unless there is an emergency.

4. Make friends with good debts

Not all debts are bad. For example, a mortgage to buy your home. The median home price in the United States is approximately $ 310,000. If you take a 30-year mortgage to buy a home at this price, with a down payment of 20% at 4% interest, you will end up paying a total of $ 532,795.47 (including interest). However, by adjusting inflation to house value after 30 years, it is expected to be $ 613,240.33 – which means you made a profit of 15.1 percent on your debt. On the other hand, if you spend all that money on rent for the same 30 years, you will have absolutely nothing.

5. Save to invest

Some young people, especially millennials, who started their working lives during the 2008 financial crisis, are very cautious when it comes to the stock market, mutual funds, and other financial instruments. They prefer to keep their money in cash rather than risk it in the market. But history has shown that exposing yourself to the market is the best way to ensure that your money grows faster than inflation.

It is true that the market fluctuates over time. But on average, the SP 500 has had average annual earnings of 4.2 percent since 2000, while average annual inflation during this time is 2.3%. A dollar invested in 2000 would have become $ 2.10 today. This despite recessions. If that same dollar had been kept in cash, it would only have 66.4 percent of its current value.

I also recommend investing in assets that have these three benefits:

  • They increase their value over time, so that in the future they can be sold for a profit.
  • They are the cash you use monthly.
  • They have tax benefits like 1031 in real estate.

When you make an investment, you should always think of the worst possible scenario and prepare for it. People regularly expect extraordinary returns on investment, hoping for the best case scenario, but they have no strategy in place in case things go wrong. Diversification is the key – remember never to put all your eggs in one basket.

6. Take only what you need

Having what you need opens income opportunities throughout your life, nobody taught me about the debts I was going to accumulate in the process. College loans can be a form of good debt, but only if your future income can afford it. The debt you generate to finance your education should never exceed the income you hope to obtain in the future.

7. Avoid unnecessary consumerism

The simplest principle that will help you take immediate control of your financial destiny is to focus on minimalism and avoid consumerism. Truly wealthy people do not boast of their wealth. Rather, they save and invest their money instead of spending it on items that make them look like they have money. You may have to say goodbye to that new pair of Nikes or eat at home more often, but at least you won't have to eat cat food when you're 70 years old. An Integer Group study showed that 64% of consumers don't think branded products are better than the cheaper option. Really wealthy people don't care what others think of them and don't have the desire to impress those around them.

The way I define minimalism is very simple: Just spend money on the things you need that bring real value to your life.

8. Be patient

When I was younger, I wanted success and I wanted it immediately – and I was willing to go into debt to get it. If you watch a lot of television, you probably have the impression that people become financially independent and make a fortune overnight. Then I realized that wealth accumulates over time. I have learned to be patient and disciplined with my investments and expenses.

Your health and peace of mind are your main asset. Never risk your health for money – even if you think you can because you are 22 years old. We all have potential. We are unique, but we are not different from others. We can all be someone, but how much we want to be that person is what shapes our current actions. And there is no better time than your twenties to dream big, think big and more importantly, act big.

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