Your 20s is the best time to get started with anything. Especially in terms of finance. Because like anything else in your life, it’s a skill that needs time to hone. One thing for certain is that apart from trust fund babies, no one ever stumbles on wealth. It’s a deliberate and intentional plan that came from the knowledge a person has.
Now, to set realistic expectations, you’re probably not going to be financially free in your 20s, but if you mismanage your finances in your 20s, it could spiral you into a rat race in your 30s, 40s, or even 50s. The entire idea is that you have time on your side, so take advantage of this compounding and you’ll thank yourself for this decision when you have a family.
That being said, even if you’re not in your 20s anymore, here are 6 ways to set yourself up for financial freedom:
1. Understand inflation and valuation
Because of the COVID-19 situation in Malaysia, there have been a few stimulus packages that were implemented in hopes that it will help society. This is great news for the public but what most people don’t see is what comes after—inflation. Inflation is the silent killer of our buying power. Maybe today you can still buy that Nasi Lemak for RM2, but it may not be the case tomorrow.
However, the value of a certain product has a different meaning. For example, although the property market might be inflated, the value of it might be the fact that you have a safe place to stay.
This can be a tough lesson to many but it can be the foundation for all the financial decisions in your life. So ask yourself this:
- Will this item make me any better?
- Does the value I get from purchasing it exceed the price I am paying for it?
2. Build passive income
The world is quickly changing as more and more people realise that one single event may cause them to lose their job. For this same reason, it is important to have a passive income source that generates revenue when you sleep. Another benefit of having a passive income stream is alleviating some of the stress knowing that you’ll be alright if you got laid off out of the blue.
Generating passive income may start slow, but give it a few years and it can grant you the freedom you’ve always wanted. After all, your time on this planet is limited, do you really want to spend most of your time in your office?
3. Avoid bad debt
Whether it is credit card debts or student loan, make smart decisions when it comes to borrowing money. You don’t have to attend university if the course is not going to help you become a better person or yield more income after you graduate.
Getting into bad debts early in your career locks you into the cycle of debt that may seem impossible to get out of. Not just that, it will also limit you tremendously when you finally decide that you want to buy that house.
4. Start investing
Investing at a young age is the biggest advantage anyone can have in the markets. That’s all thanks to the concept of compound interests. The longer you can have your money invested, the higher the exponential growth can be.
Even if you really have nothing to invest, the least you could do is to educate yourself about investing and how money flows in society. Learn about savings accounts, stocks, bonds, mutual funds, index funds and real estate. Learn about how a tiny commitment each month can easily add up to over a million dollars when you finally retire.
5. Avoid unnecessary spending
It’s tempting to just go on to Zalora and start browning through each section just to see what they got and end up with a message on your phone saying the parcel will arrive in 5 days. That’s fine, but don’t spend just to keep up with your peers. But at the same time, you don’t have to deprive yourself to do so, either. A crucial part of budgeting is knowing the difference between what you need and what you want.
Establish a habit of saving and following your financial calendar in your 20s. Look for ways to reduce large recurring expenses and invest the balance. Embracing a frugal life will allow you to spend more on the things that mean the most to you later on. And this perspective on life will serve you well beyond your 20s.
6. Be patient
It can be deterring to see some of your peers excelling at their profession while you still struggle to find yourself. But try your best to focus on yourself. Dig deep inside and figure out who you are as a person. Then, don’t stop at anything until you’re the master of that one thing.
Many people have forgotten that investing is not the only way to make money. An even better way is to be so good at something that corporations will pay you huge amounts just to have your service.
Wealth is accumulated over time and you shouldn’t sacrifice your health for it even if you’re 22. Just focus on putting one step ahead of another in your career and a chunk of your income into your investment portfolio. The rest will work itself out over the coming years.