Part of the New Guinea Commerce Winners Don’t Cheat Series.
By Sean Jacobs and Jordan Shopov
For young people today the idea of building wealth can be daunting. Never in history have we been so well off but, at the same time, so overwhelmed by financial advice. A dizzying suite of credit cards, savings funds and mortgage offers mix with technical terms like ‘derivatives’ and ‘negative gearing’ to present a confusing picture of the world of finance.
Ideas like saving and ‘thinking long-term’ in your twenties can be difficult. And, without putting your money to use, a decade can pass with little to show other than a pile of debt. But the path to wealth and financial freedom is made much simpler by considering just three basic steps.
Step one is to avoid debt. The investment legend Warren Buffett says that the biggest suggestion he has for young people is to ‘avoid credit cards.’ It’s simply impossible, he says, to get ahead by paying 16-18 percent interest. To avoid debt some people cut their cards up, others use debit cards (so they actually have the cash first) or just enlist self-control in exchange for impulsive buying and poor decisions.
Step two is to spend less than you earn and invest your savings. Spending less than you earn doesn’t always mean tightening your belt but sorting out what’s central to your life and what isn’t. An education, for example, is probably something you want to spend money on versus a holiday in the Bahamas. And when you take time to examine what you spend money on, versus what you actually need, it’s amazing how much income can be spared.
In terms of investing your savings it’s not optimal to just place cash in a savings account – your money needs to go up in value not just when you work but even when you sleep, eat and relax. Pouring money into a savings account can also be outpaced by inflation.