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If You Want to Be Wealthy, Where Should You Be Financially at 22?

Posted on the 01 June 2018 by Smallivy

Everyone knows that they will need a lot of money when they retire, yet few people actually save enough when they are younger.  You see, if you can save just a little when you are young it is a lot easier to have enough at retirement than if you wait until you are 55 and try to save every dime.  The reason is the power of compounding.  If you start at 55, you need to earn pretty much every dime through working.  If you start at 20 and invest, you will only need to earn only a few pennies for every dollar you’ll have at retirement.  For example, $2,000 invested today by a 20-year-old will be worth about a quarter million dollars at age 69.  If you just put away about $2000 per year for the first four years you were working, you would be a millionaire at age 70!

The trouble is that most 20-year olds aren’t going to put away $2,000 for retirement.  They are going to spend in on alcohol, or cars, or stuff for their apartments, or a trip to the beach.  They may just spend it going out to eat or at the mall and not really know where it all went.  30-year-olds aren’t that much better.  Instead of alcohol, they’ll probably be spending on things like home improvements, things for the children, cars, and vacations, but they will still not be putting money away like they should.

There is always something that seems more important.  Retirement seems like a long way away.  And having a few million dollars eventually seems impossible when you’re 22.  But you don’t need to have a million dollars when you’re twenty.  You just need to save enough, and then let time and the power of compound interest do the rest.  Today, let’s look at where you should be financially at 22 if you want to be wealthy.

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Credit card debt:  $0

It is almost impossible to save money if you are paying 20% interest rates to a credit card.  It is better to never touch a credit card.

Student loan debt:  $0

If you can get through college without piling up a mountain of debt, you are that far ahead.  If you do need to take out loans, at least pick a major that will give you a good chance of paying it off quickly, then continue to live like a college student for a couple of years after you graduate and use your earnings to pay off the debt.  Also, minimize any loans by finishing as quickly as you can and not using your loans to finance dinners out and a lavish apartment.  Think dinners at home, pizza, and a rented room or a small 1-bedroom.  Check out 10 Ways Anyone Can Graduate from College Debt-Free for some ideas on how to get through college without a student loan.

If You Want to Be Wealthy, Where Should You Be Financially at 22?

Car Debt:  $0

You can easily have over a million dollars at retirement if you go without a car payment your whole life.  You can buy a very reliable car for $2000-$4000 from a private owner that will last for several years.  If you want, you can save up additional money and trade up in car in a year or two.  The other great thing about cheap used cars is that they don’t drop in value much.  Some people actually make money by buying and selling cars regularly, looking for deals.  Check out How to Buy a Used Car by Dr. Zeke for tips on how to find a good deal on a used car and what to look for when you do.

If You Want to Be Wealthy, Where Should You Be Financially at 22?

Savings account:  $9000

As soon as you can, put enough money in the bank to take care of car repairs, minor medical bills, and other emergencies.  This will keep you from getting into credit card debt in the first place.

401K/IRA: $4000

Start an IRA or a 401K account and start funding it regularly.  While the amounts saved may seem ridiculously low at first, you’ll be amazed how much you’ll have in five or ten years.  The trick is to invest regularly.  The Bogleheads, followers of Vanguard founder Jeffery Bogle, always have great tips on investing, so read The Boggleheads’ Guide to Retirement Planning to learn about the types of accounts used for retirement and how to invest within those accounts.

If You Want to Be Wealthy, Where Should You Be Financially at 22?

Investment Account: $0

At 22, when you’ve just started a job, you need to be concentrating on setting up your emergency fund, putting money away for retirement, and getting a reliable used car.  It’s OK if you don’t have anything to invest yet.  You have time.

At 22, if you can avoid debt, put together an emergency fund, and start putting money away for retirement you will be far ahead of your peers and well on your way to becoming wealthy.  Dave Ramsey is the king of personal finance.  Take a peek at The Total Money Makeover for his baby step plan to get out of debt and live a stress-free financial life.

If You Want to Be Wealthy, Where Should You Be Financially at 22?

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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