Personal Finance

9 Things 20-Somethings Should Do to Be Financially Free by 40

Expertise: Landlording & Rental Properties, Real Estate News & Commentary, Personal Finance, Real Estate Investing Basics
112 Articles Written
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Once upon a time, nearly everyone worked until their 60s. Today some people retire at 35, others retire at 85. There’s no right or wrong age to retire; the only requirement is that you must be financially independent.

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Financial independence is not some vague analog for “rich.” It has a very specific definition: being able to cover your living expenses with the income from your investments.

In other words, not having to work a job, in order to pay your bills. And you can reach it in a few short years if you’re truly driven.

Consider Brady Hanna, who went from $0 in passive income at age 30 to $40,000/year passive income by his mid-30s.

It takes two core ingredients to reach financial independence young: will and knowledge. I can’t help you with the will–you either have it or you don’t. But the knowledge I can help with.

Here are nine things you need to know, and more importantly to do, if you want to achieve financial independence by the time you reach 40.

1. Invest for Speed Now and Safety Later

When you’re young, an investment that drops in value is a temporary setback, not an emergency.

That changes when you’re no longer generating active income. When you first retire, you’re vulnerable to sequence of returns risk: the risk of a crash early in your retirement depleting your nest egg beyond the point that it can recover.

But for now, you’re not dependent on your investments for income. So your goal should be high returns and maximum passive income (more on that shortly).

As long as an investment isn’t actively costing you money (such as a rental property with negative cash flow), and you have reason to believe it will rise in value in the future, don’t stress about it. Just leave it be and keep investing while the market’s down and assets are cheap!

Young Asian businesswoman frowning with concern as she tries to understand something she is reading on her laptop computer scratching her head with her pencil in perplexity

2. …But Avoid Expensive Mistakes

When I was in my 20s, I had the will but not the knowledge necessary to reach financial freedom. I made a lot of mistakes.

That’s the problem with being in your 20s–you think you know more than you do, because the universe hasn’t had much of a chance to prove otherwise yet. It’s a pleasant, if dangerous ignorance, and it doesn’t last.

Learn everything you possibly can from more experienced investors. Read every article you can; listen to every podcast you can. The sad fact is that new real estate investors make the same five or six mistakes, because they charge ahead without pausing to learn from others who made those mistakes.

When I first started investing, I made the classic, all-too-common mistake of underestimating rental expenses. I didn’t understand how rental cash flow works. It works through long-term averages rather than what happens in a typical month—a lesson I learned the hard way after tens of thousands of dollars in losses.

Related: 7 Lessons I Wish I’d Known When I Started Investing in Real Estate

A few other common mistakes:

I’ll summarize with a simple proverb: “Smart people learn from their mistakes. Wise people learn from others’ mistakes.”

3. Minimize Your Living Expenses

People in their 20s are notorious for trying to show off how successful they are. It’s an impulse that comes with being that age, like hitting the early-bird special at the Golden Corral for 70-somethings.

But it’s a self-sabotaging impulse. Showing off your wealth means spending money, and money spent is money you can’t use to build real wealth.

There are plenty of extreme savings tips you can follow, but start with your four greatest expenses: housing, transportation, food, and taxes.

Related: Extreme Budgeting Tips: Save Up a Down Payment Fast

For housing, find a way to house hack. Contrary to popular belief, housing is not a mandatory expense, despite eating up 25 to 50 percent of most Americans’ incomes.

Ideally, move into a home that lets you get rid of your car. According to AAA, the average car costs nearly $9,000/year in America between gas, maintenance, parking, insurance, and car payments. Find a way to get to work and amenities by walking, biking, public transportation, scooter, whatever.

Stop eating food prepared by someone other than yourself. It’s healthier and saves you massive money.

Ultimately, the less money you spend on living expenses, the more you can put toward income-producing investments.

Close up view of bookkeeper or financial inspector hands making report, calculating or checking balance. Home finances, investment, economy, saving money or insurance concept

4. Maximize Your Passive Income

You need passive income if you’re to ever reach financial independence.

One obvious source is rental properties, but it’s not the only source. Others include dividends from stocks, bonds, private notes, crowdfunding websites, real estate syndications, even royalties. For that matter, you can even rent out your car on Turo in order to turn your vehicle from a money-draining expense into a source of income.

As you earn more passive income, you can reinvest it to snowball your total income. Your money should work for you, not vice versa. Put as much money to work as you possibly can to build wealth and income faster.

5. Maximize Your Active Income

The more you earn, the more you can put toward your investments and building more passive income.

Push for promotions and raises. Ask for more responsibility. Network with others in your field. Always keep an eye out for a new, exciting, lucrative opportunity to increase your income.

Just be careful not to spend the extra money as you start earning it.

6. Avoid Lifestyle Inflation

Here’s an amusing statistic for you: the average person buys a new car within 19 days of receiving an inheritance, Money.com reported.

As people acquire more money, they tend to spend it. When people get a raise, they tend to move into a bigger home or buy a fancier car. They go out to dinner more. They show off their wealth and newfound status to their friends, family, and coworkers.

Keeping up with the Joneses is a recipe for debt, poverty, and a never-ending sense of “not enough.” There will always be someone wealthier than you, someone more stylish, someone who drives a sexier car and lives in a trendier zip code.

Do yourself a lifelong favor and graduate beyond trying to impress other people. Everyone graduates from it eventually, and the younger you do, the happier and wealthier you’ll be.

Hold your spending in check, continue living a simple lifestyle, and keep funneling your money into investments. That’s the key to financial independence and early retirement (aka FIRE in personal finance circles).

Avoid lifestyle inflation and you’ll be sipping piña coladas on a beach at 40 while your friends still have another 25 to 30 years of work ahead of them.

7. Invest in Both Stocks and Real Estate

Rental properties are great for ongoing passive income, and flips are great for quick turnarounds and velocity of money. But real estate investors have a bad habit of ignoring equities.

Stocks and rental properties were neck and neck as the two highest-performing investments over the last 145 years. And best of all, their strengths complement one another.

Rentals generate predictable passive income, even as they tend to appreciate in value rather slowly. They also require a great deal of cash to buy, even when leveraged, which makes for poor diversification.

Stocks tend to generate only moderate income through dividends. But they appreciate faster than real estate on average, and low-cost index funds make it easy to diversify.

Use your tax-deferred retirement account to gain exposure to stocks, and reduce your tax bill in the process.

good hand, good job , man show thump up for agreement sign with success business concept.

8. Don’t Try to Time the Market

Another foible of human nature: thinking you’re smarter than everyone else and can time the market. You can’t.

Believe me when I tell you that the investment banks and brokerage firms on Wall Street have far better market data than you do, and employ some of the smartest, most ambitious people in the world. And they can’t accurately time the market either.

To successfully time the market, you need to be right twice. Once when you buy at the perfect time and again when you sell at the perfect time. How likely is that?

The good news is that you don’t have to time the market to make good investments. When you buy a rental property, you only need it to produce strong cash flow based on today’s numbers. Whether the property goes up or down in value is immaterial, as long as it keeps generating the same cash flow.

The same goes for stocks if you invest in fundamentally strong companies and index funds. So what if the market crashes tomorrow as long as you continue earning dividends and the fund goes back up in value eventually? You can always buy more shares when it goes down in price.

Here’s one final thought on timing the market: the eventual dip in pricing may still be higher than today’s prices. If shares cost $100 today and you wait around for the next bear market, they might have risen to a high of $150 by then and only drop to a low of $110–still higher than what you’d pay today.

Just invest a certain amount at regular intervals (known as dollar cost averaging) and stop wasting energy thinking about timing the market.

9. Track 3 Metrics Every Month

There are a million numbers that financial advisors throw around. I focus on three: savings rate, FIRE ratio, and investable net worth.

When I wrote about what 30-somethings need to know about financial freedom, I covered these three metrics in more detail. But here’s a quick summary.

Savings rate is the percentage of your income that you put toward savings and investments—or if you have debts, toward paying them off.

FIRE ratio (or FI ratio) is the percentage of your living expenses that you can cover with passive income. When you reach 100 percent, you’re financially independent and working becomes optional.

Investable net worth is the sum of your investment assets, minus all debts and other liabilities. Exclude your primary residence, vehicle, and any other personal property and only focus on assets that can actually be invested. You can track your net worth automatically using Mint.com.

When you track those three numbers every month, it forces you to pay attention to your progress toward financial freedom. As they say in business, that which gets measured gets done.

tired, frustrated young couple going over bill man sitting at desk with laptop woman looking over his shoulder

Final Thoughts

No one says you have to retire once you reach financial independence. I don’t plan to.

But when you no longer have to work for money, you can pursue any passion you like. I’d like to write novels, maybe open a wine shop with my dad. It’s work that may not pay well, but it sure sounds like fun.

In fact, I think of financial independence not as “the ability to do nothing” but rather “the ability to do anything.”

Reaching financial independence at a young age requires discipline though and deferred gratification. You have to be willing to watch your friends pull up in a brand new BMW, while you pull up in the same beater from 10 years ago—or better yet, on a bike.

As a parting thought, frugality can either be fun or it can be a chore. Living in the moment—and happily—doesn’t require you to spend a certain amount of money every month. Find a way to enjoy the process, and it goes from being a sacrifice to a lifestyle choice.

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Looking for a plan to achieve financial freedom in just five to 10 years? Even with a full-time job, median income, or negative net worth, you can accumulate a lifetime of wealth in a short period of time. Set yourself up for life with this bestselling book, written by the CEO of BiggerPockets, Scott Trench! Pick up your copy from the BiggerPockets bookstore today!

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Where are you on the road to financial independence? What steps are you taking to get there?

Share (and hold yourself accountable) in a comment below. 

 

G. Brian Davis is a landlord, personal finance expert, and financial independence/retire early (FIRE) enthusiast whose mission is to help everyday people create enough rental income to cover their living expenses. Through his company at SparkRental.com, he offers free rental tools such as a rental income calculator, free landlord software (including a free online rental application and tenant screening), and a free masterclasses on how to reach financial independence within 5 years.

    Brianna Ware from Washington D.C.
    Replied 5 months ago
    Excellent read!
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thanks Brianna!
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied 5 months ago
    Great article Brian!
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thanks Andrew, much appreciated!
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thanks Nick!
    Jacqueline Herrera
    Replied 5 months ago
    OMG am inspired 🙂
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    So glad to hear it Jacqueline!
    John C. Investor from New York, NY
    Replied 5 months ago
    Excellent. I enjoyed the article. Thanks!
    Brandon Moore from Central Arkanas
    Replied 5 months ago
    Great and informative read!
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thanks Brandon, I appreciate the comment!
    Travis Jonas from Redmond, Oregon
    Replied 5 months ago
    I think of financial independence not as “the ability to do nothing” but rather “the ability to do anything.” This is great.
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thanks Travis!
    Deanna Opgenort Rental Property Investor from San Diego, CA
    Replied 5 months ago
    I do take exception to the “everyone should do without a car to save money” thing. In a few places (New York, DC, San Francisco, etc) public transit is available, reasonably priced, and it works. Other places (rural anywhere, Southern CA EVERYwhere) being without a car limits your job choices and forces you to choose between either overpriced or unsafe neighborhoods.
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    There’s often a gap between “ideal” and “practical.” But often married couples can get away with sharing a car – my wife and I do. And when that’s not possible, you can still drive inexpensive cars, and/or rent out your car on Turo sometimes, etc.
    Scotty Ball Investor from Gainesville, Georgia
    Replied 5 months ago
    Great article! Wish I had read this when I was 22!
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thanks Scotty, I wish I’d read something similar when I was 22 too!
    Susan Maneck Investor from Jackson, Mississippi
    Replied 5 months ago
    I know there are a lot of FIRE people in this forum but the discussions regarding it, including this one, are missing one key element; namely how they intend to deal with the issue of health insurance.
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    That was outside the scope of this particular article, but it’s something I’ve addressed in other articles, and in the course we teach on FIRE from Real Estate. Options range from working a fun job that includes health benefits, the ACA exchanges, association health plans, private exchanges, moving overseas (I interviewed a couple who cut their health insurance costs by 75% by moving to Europe), having a spouse who works a job with benefits, and beyond.
    Tashsa Holmes
    Replied 5 months ago
    I really enjoyed the article!!! Especially liked the proverb you mentioned about a wise person learning from others mistakes. A good reminder and effective in all aspects of life. Thanks!!!
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thanks Tashsa, I’m so glad to hear it resonated with you!
    Steve Elling
    Replied 5 months ago
    Love this post. The key passages relate to withdrawing from the race to up with the Joneses. The less spent on fashion, vain trends and the latest big-screen TV will go a long way in retirement for anybody in their 20s or 30s. But I have my doubts that many will listen. The instant-gratification mindset is a bigger part of the young American consciousness than ever before. Be forwarned: Here comes a “back in my day” anecdote. But it’s timely and relevant. We’ve all seen the myriad stories about the crushing student loan debt being incurred by today’s 20-something students. Well, when I was in college, for spring break, we went camping, slept in tents, sneaked into the national park’s swimming pool and drank Old Milwaukee beer in cans, because it was cheap. A month ago, I received a text message from the college-age son of a good friend of mine who asked for a recommendation where he and his buds could go for spring break. They had flown to Cabo San Lucas the year before and wanted to select a different destination this year, maybe something on the East Coast. They attend school in NorCal. You can bet a few of them were using their student loans to fund the trip. So, not only are many not saving their money, they are burning through other people’s money at an interest rate of, what, 6-7% annually? Incredible. But on the plus side, I will be renting homes to people like these guys for the next 30 years.
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thanks Steve! And it’s true, people with heavy debts should not be spending money on luxuries like flight vacations. Thanks for sharing the story!
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thanks Steve! And it’s true, people with heavy debts should not be spending money on luxuries like flight vacations. Thanks for sharing the story!
    Daniel Somers Rental Property Investor from Tiffin, OH
    Replied 5 months ago
    Good article!
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thanks Daniel!
    Eddy Ogbekhilu
    Replied 5 months ago
    Brian, your article is wicked and at the same time therapeutic in so many level. The gap and practicality of an idea is in my own view likened to a yield sign, hump or a 4way stop sign…still driving but with modifications to ones driving behavior at a particular moment/time.The reference to smart people learning from their mistake and the wise from other people mistakes sums up behavior modification that relates to delay gratification. Brian, thanks for this article,like some had indicated wish I was privy to this 20-30 yes ago,struggling so hard at this time to impact my son with this free knowledge that is so ubiquitous, like a gym,and still yet lots of people are morbidly overweight…give me reason why you should do something different and not why you can’t do it. Once again thanks for the article and thanks to all that have made some comments that are very helpful as well.
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thanks for reading Eddy, and for the comment, I’m glad the article was useful for you!
    Patrick Volpe
    Replied 5 months ago
    Nice post Brian. There are some good nuggets in here for certain. I always recommend talking to a licensed investment professional before diving in. Throwing caution to the wind is akin to lighting a pile of money on fire in your driveway.
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Definitely true that you need to know what you’re doing before you start throwing tens of thousands of dollars around!
    Steve Bass Investor from Portland, OR
    Replied 5 months ago
    Great read Brian. I’ve enjoyed your past articles but this one really amplified my mantra. Live within your means. Anyone can retire at any age it’s just a matter of controlling your expenses. Real Estate investing has helped me look at my day job in a different light. I enjoy my day job even more now that I know I don’t HAVE to do it. Real Estate is my side hustle to financial independence. Thanks Brian!
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thank you so much for the kind words Steve, I really appreciate them. And I’m so glad to hear the articles have been helpful, sounds like you’re well on your way to financial independence and have already found happiness!
    Dean Hanson from Melbourne, FL
    Replied 4 months ago
    Great read. I read several of the hyperlinked articles as well. This platform is going to be a great source for my future. Thank you for what you do, it means a lot! My will has been thriving for years, this helps the knowledge.
    G. Brian Davis from Baltimore, MD
    Replied 4 months ago
    Thanks for reading Dean, and for the comment! Glad to hear it was useful for you!
    Jeffrey Bower
    Replied 3 months ago
    "Showing off your wealth means spending money, and money spent is money you can’t use to build real wealth." Ain't that the truth!
    Jerraill Murphy Rental Property Investor
    Replied about 2 months ago
    Great article. Simple, practical information that you can immediately begin to implement. This is exactly why I joined this community. Thank you!