Creating Sustainable Wealth While Still in Your 20s

Creating wealth is largely a function of time. The sooner you take actions to create wealth, the more likely it is that you will achieve it.

Aug 17, 2014 at 2:00PM

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Source: Flickr

Many people think that achieving wealth only happens in later stages of life when they have attained a good education and established themselves in their careers. After many years of hard work you might be able to retire or go on that trip around the world.

However, the accumulation of wealth is not happening in an instant -- it is a process that requires understanding, discipline, and action.

Many people appear to underestimate the aspect of 'starting early.' The sooner you start putting yourself into the right mind-set, the sooner you start saving and putting money into equities, the sooner you will reach financial independence and the levels of wealth that you desire.

Unfortunately, financial illiteracy is a big problem in America as well as in other Western countries thanks to the levels of prosperity the generations before us have already achieved. We take way too many things for granted.

But, putting you in the proper money mind-set is paramount in making sure, that you have a realistic shot at becoming wealthy. While a lot of discipline and hard work will be required, understand that the easiest thing you can do to become wealthy, is to start saving money while you are still young.

1. Discipline
Saving money is an exercise in discipline, nothing else. You will feel a lot of temptations to spend money on a lot of unnecessary things, but understand that saving is a way of investing in yourself.

Reaching financial independence and having the freedom to do as you please is much more valuable than buying the latest electronic gadgets.

2. Understand the power of compounding
This is a key concept in wealth building that many young people disregard. But understanding the value of regularly reinvesting interest/earnings is a sure-fire way of creating wealth.

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Source: Vanguard

Assume an investment of $10,000 at the beginning of the investment period (which can span for 40 years or more when you are in your 20s) and that you get paid 6% interest.

If you withdrew your interest income annually from your investment account, your ending value will, of course, be $10,000.

On the other hand, if you reinvested all your interest income at the assumed 6% interest rate, your investment portfolio value would have skyrocketed to more than $102,000 after 40 years.

This is the demonstrated power of compounding.

3. Stay out of debt
This should be fairly intuitive, but unfortunately it isn't. Many people live way above their means and actually slip into debt at an early age.

Understand that our society glorifies consumption and doesn't view debt as a bad thing.

But it is. Nothing kills dreams and financial independence more than consumer debt. High-interest rate credit card debt is especially toxic for your financial future and should be avoided at all costs. Remember: Rich people earn interest, average people pay it.

The Foolish Bottom Line
The biggest advantage you have to setting the foundation for sustainable wealth is your young age. Start saving and investing your money on a regular basis when you are in your 20s when you don't have a lot of expenses to cover. Make sure you have a solid understanding of the concept of compounding.

Watching your savings grow on a consistent basis can be very empowering and satisfying, too. If you want to accomplish your dreams, whatever they are, start saving today and stay as far away as possible from any form of consumer debt.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

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Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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