Key points
- Your early adulthood is a critical period for establishing your financial foundation.
- Make paying off high-interest debt a top priority to avoid racking up interest and bolster your credit score.
- Build up a rainy-day fund of three to six months’ worth of expenses.
- Retirement accounts are a great place to begin investing, followed by brokerage accounts.
- Stick to financial best practices, but don’t worry if you fall short from time to time.
- Regularly review your plan and adapt it as necessary with a certified financial planner.
Most people don’t necessarily consider their early adulthood to be key wealth-building years. And while many people haven’t hit their prime earning years that typically come with experience, it is nonetheless a critical period for building your wealth. Sticking to smart wealth-building principles during early adulthood is essential to establishing lifelong habits for your financial future.
But what exactly does wealth building for young adults involve? Here are a few of our top tips — put them into practice today to set yourself up for future financial success.
Top Wealth-Building Principles for Young Adult
1. Pay Off High-Interest Debt
Before you double down on accumulating wealth, you may want to focus on erasing your high-interest debt. This applies to all types of debt — credit card, medical, auto loans, etc. — but for young adults, this most commonly means student loan debt. Typically, a high-interest rate is anything over 6-8% or what you can earn on your money if you invest it.
With student loans so often carrying high interest rates, they can quickly rack up high additional costs. Say, for example, that you have $100,000 in student loan debt at a rate of 9% — every year you go without paying it off will cost you an extra $9,000. Even if you were to invest or save the money you put toward student loan payments, you’d be hard-pressed to make a consistent return of 9% or more on it.
Paying off as much of your student loan debt as you can as soon as you can won’t just prevent you from racking up additional interest — it can also bolster your credit score. Consistent loan payments are one of the best ways to boost your credit score, and the better credit you have, the better rates you’ll get on loans in the future. You may even be able to refinance your existing student loan debt, which can result in serious savings.
2. Build Up a Rainy-Day Fund
Your savings account may not be the first tool you think of when it comes to wealth building, but it’s critical to build up a cash reserve for emergencies and unexpected expenses before jumping into more serious investing. In the case of a medical emergency, legal fees, car repairs, or other urgent costs, you’ll need cash that you can immediately withdraw — ideally, without the financial penalties that withdrawing from a 401(k) before retirement age incurs or realizing gains by selling assets in a brokerage account.
This rainy-day fund is even more important in the event that you lose your job. Just because the paychecks stop coming in doesn’t mean that the bills will, too — and having the cash on hand to cover expenses for a few months while looking for another job can mean the difference between maintaining your financial independence or moving back into your parents’ house.
As a general rule, it’s a good idea to save up three to six months’ worth of expenses, although you may need more or less depending on things like your job stability, health, and the strength of your support network.
3. Start Investing
Once you’ve paid off your high-interest debts and saved up enough to handle any curveballs life might throw your way, you can begin investing in earnest. When it comes to wealth building for young adults, a retirement account like a 401(k) is typically the best place to start.
The annual maximum you can put into a 401(k) as of 2023 is $22,500, but don’t be discouraged if the amount you can afford to sock away falls short of that, especially at first. Thanks to the power of compounding, even small investments now will likely pay off exponentially when it comes time for you to retire. A good initial goal to work toward is contributing enough to max out any match your employer might offer so that you’re not leaving money on the table.
If your company doesn’t offer a 401(k), or if you want to open a different/additional account, you can also consider:
- IRAs
- Roth IRAs, especially beneficial when your salary is low but expected to grow
- SEP IRA (for the self-employed/small business owners)
- Solo 401(k) (for sole proprietors/independent consultants with no employees)
After you’ve built up a solid nest egg in your retirement account each year, you may want to look into brokerage accounts, which allow you to buy and sell financial assets like stocks, bonds, mutual funds, ETFs, etc. While brokerage accounts are not tax-advantaged the way retirement accounts are, you can also withdraw from them penalty-free at any time you want — not just after retirement age — making them great places to save up for larger financial goals like the down payment for a home.
4. Follow Best Practices (Within Reason)
A lot of popular wealth-building principles circulated today — especially ones with concrete numerical targets — are well-intentioned, but perhaps a bit outdated. You may have heard, for example, that you should:
- Stick to the 50-30-20 rule of budgeting, where you dedicate 50% of your earnings toward necessities, 30% toward discretionary spending, and 20% toward savings.
- Spend no more than 30% of your income on your rent or mortgage.
- Buy a home as soon as you can, rather than renting indefinitely.
While these rules are all sound in theory, inflation and rising housing costs mean that they’re not as easy to follow as they once were. If following them to a T does make sense given your income, expenses, and personal financial goals, great — but don’t sweat it if you need to make adjustments based on your own circumstances.
What’s more important is to take the ideas behind these pieces of advice to heart: save up consistently, aim for a rent/mortgage that’s within your means, exercise caution in discretionary spending, and build up equity when you can.
5. Review & Adapt
As you grow older, your priorities — and the personal financial goals that go along with them — will likely change. You might, for example, go from prioritizing paying off student loan debt to saving up for a down payment on a home. And it’s never too early to get a head start on important future financial milestones like children’s college funds and estate planning.
However your goals and circumstances change, you’ll want to make sure that your financial plan accounts for them. Check in from time to time — at least two to three times per year — to see how you’re tracking against your existing financial goals, identify any new ones you might have, and think about how you can adjust your plan to accommodate those.
Even if the milestones you’re planning for are still quite a ways down the line, planning for them now will make it all the more likely that you achieve them.
Your Best Investment: Investing in Your Own Development
As you embark on your financial journey, it’s important to remember that you are your greatest asset. This is particularly true in your 20s, when you can lay the foundation for your future success. Just as you start building your wealth, you can start building the knowledge you’ll need to navigate your financial future. Investing in yourself early on can pay off in a big way by putting you on the path to financial wellbeing.
Read More: Do I Need a Financial Advisor?
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