Young, High Savings Rate & Index Fund Investing? You’re doing it wrong

If you are young, investing in index funds and focusing on a high savings rate – I have bad news for you.

Wrong! You are doing it wrong.

Do not get me wrong, regularly investing in a low cost index fund and saving a crap ton of your income will build wealth gradually over time.

The internet is littered with stories like this (see: The Mad Fientist, Steve from ThinkSaveRetire and Our Next Life). But its the boring, slow, grandma path to reaching financial independence (FI).

This path has become so common place that its like going to a restaurant, not looking at the menu and ordering #3 because everyone else orders #3.

Sure, #3 has great reviews, makes people happy and brings customers back. But there is a new chef running the kitchen with world renowned talent and he’s adding items the the menu.

Some of the chef’s new items are worse than #3. Some of his items are just as good as #3. A few of his new additions to the menu are a bazillion times better than #3.

However, if you never look at the entire menu, you may never discover there are options other than #3.

Menu item #3 is the ‘save a ton and invest in low cost index fund’ path to FI. It’s a solid option and many people would be happy with this order.

Many would argue #3 is infallible. Others would yell blasphemy at the recommendation of ordering another item on the menu.

Well, I am here to tell you that is just plain WRONG. There are many noteworthy paths to financial independence and there is no one size (or menu item) that fits all.


Let me reiterate something for you. You – are – YOUNG. That means you have the greatest asset on your side – TIME.

The best part about being young is time. When you are in your 20s or 30s you have an abundance of time. The older we get the less time we have. But what does this have to do with risk taking?

When you are young, you have time to lose all of your money and make it back again. Having time provides a chance to recover. Someone who is 65 and entering retirement should not take significant risk. Sorry grandma – you aren’t invited to this party.

Grandma is sitting this party out

You are young and should need to be taking risks. To be clear, I am not encouraging you to go to Vegas and place everything you own on black. Only a fool does that.

Mr. T Pities the fool

Risk should not be taking all willy nilly, on a whim or because others are doing it. More importantly, focus on taking calculated risk (more on that later).

Sure, the generic advice of save a ton of your income and invest it in VTSAX will yield (good) results over time. This is the slow and steady path to financial independence and possibly the most risk adverse path too.


According to CNN Money only 52% of Americans own stocks. Many do not own stocks because of perceived risk and are fearful of their own shadows.

It’s a case of chicken little. The sky is falling! The sky is falling! But things are rarely as bad as people think.

Others simply do not have the means to invest. 

Too often in the financial independence community many are unwilling to take any risk outside of a low cost index fund. This path limits their down side but also significantly caps their upside.

A slight increase to risk can reduce the time to financial independence by months or even years. That is right, there are faster paths to financial independence but they do require taking a bit more risk.

Taking a few calculated risks provides more of a diversified path to building wealth and generating passive income. Failing to look at other options, like failing to look at the entire menu, could lead to missing out on great opportunities.

What is calculated Risk

A calculated risk is an educated guess. A few examples of calculated risks worth taking may include investing in cash-flow real estate, creating a business, buying the next Amazon or Google before they take off. Buying crypto currencies or investing in a startup are also good examples of calculated risks.

How much risk should you take

Like I mentioned earlier, I do not want you flying to Vegas and betting everything you own on black. I also do not want you putting 100% of your net worth into risky investments.

All investors should consider earmarking 1-10% of their portfolio for riskier or speculative investments. Limiting riskier investments to 10% or less will reduce the investors downside. If these investments end up worthless (unlikely), the investor will not be crippled. Investors should not use money they need for speculative investments; they should assume they may never see these funds again.

Buying real estate may require more than 10% of an investor’s portfolio. This asset class would be the one exception. Investors should only consider buying real estate that meets the 1% rule or where rents are well above the mortgage.

However, if the speculative portion of the portfolio takes off, these investments have the ability to be life changing. For example, imagine if you invested $1,000 in Google, Amazon, Netflix, Starbucks or Apple 10 years ago.

The chart below compares the returns of Google and the S&P 500. The chart dates back to August of 2004 when Google became a publicly traded company.

If you Invested $1,000 in the S&P 500 in 2004, you would have a profit of $1,415.50. If you had invested $1,000 in Google in 2004, you would have a profit of $19,052.60. That is a difference of $17,637.10 – big difference right?

If you bought bit coin 5 years ago, you would be a millionaire today.

Investing in Real Estete

You are young, maybe do not have a lot of assets and want to take some calculated risks. Real estate is a great way to take start building wealth.

Buy a single family home or 2-4 unit building with an FHA loan. This type of loan only requires a 3.5% down payment. Live at the property and rent out the extra space. This is known as house hacking.  I did this at my first property and second property

Other types of risk worth considering

Start a business or invest in a startup are great examples of risks to take when you are younger. One of my biggest regrets was not investing in a friend’s start-up.

Four years ago, I had the opportunity to get in on the ground floor of a 3-D printing company my friend founded. Being young and fearful, I passed on this investment because I thought it was too risky.

His company generated over $500,000 in revenue last month alone. A $1,000 investment four years ago would be worth way more today. Needless to say I missed out on a great opportunity.

Selecting your path forward

Taking calculated risks properly can set yourself up for life. For some this may be investing in a stockFor others it may be creating a business.

Buying real estate and house hacking allowed me to go from a negative net worth to over $500,000 in 4 years. I am 27 and will reach financial independence before I turn 30. The willingness to take risk easily saved me 5-10 years.

The biggest risk of being young is simply not taking risks. If things do not pan out, you are young and still have time to recover. A small amount of risk belongs in every portfolio.

There is not right or wrong path to financial independence. Everyone must choose the path that best fits their needs and risk profile.

Heck, people can take multiple paths or switch paths at any time as well.

Are you going to to still order #3? That is great.

Or will you consider taking a calculated risks, investing in a speculative stock or cash flow real estate and reduce your time to financial independence? That’s cool too.

20 thoughts on “Young, High Savings Rate & Index Fund Investing? You’re doing it wrong

  1. Boring grandma reporting for duty! Although to be fair my savings rate isn’t what I would consider high, and $1000 sadly isn’t an inconsequential amount for me. So I’ll be waiting until I’m on more solid financial ground to take actual risks.

    But I have been thinking about ways to take more calculated steps/risk in the future beyond the index fund way. This is excellent food for thought.

    • Glad you enjoyed the food for thought. Hope you consider taking some risk once
      you find solid financial ground. Until then, have fun grandma

    • You are the perfect age for taking risks! Sounds like you have a great situation to take risks given the salary and savings rate. Hope you find some calculated risks worth taking.

    • Whoa! That’s awesome. Get him started at 15. I can only imagine where he could be at 25 or 30. He will have an extra decade of compounding to take advantage of.

  2. I love this advice! I see a lot of information about paying down debt, but not much on growing wealth. It may take some debt and/or risk to grow wealth, but it’s worth taking that risk when you still have a long investment time line. Great encouragement to take a bit of a leap…especially into real estate. 🙂

    • Glad you enjoyed the advice. Paying down debt isn’t a bad thing. However, if the debt has a low fixed interest rate, paying things off quickly may not be wise. Interest rates are at all time lows. I can get debt for 4-5%. The market usually provides 8-10% returns. I would be better off investing extra money and letting inflation destroy the debt.

      Though – some may find peace of mind being debt free. Just proves that there is no perfect option for EVERYONE. Personal finance is not 1 size fits all

  3. You’re completely right that younger people need to take risks. If you do your homework and dont it expose yourself to TOO MUCH risk then you can have a great opportunity. I’m 27, max out retirement accounts, invest the rest in index funds, but since I don’t have a family I still put money into a property and cryptocurrency too. Because like you said, why not when you’re young?

    • Dude – by all accounts you are killing it. Keep it up. You have no responsibilities (in terms of a wife or kids). You are also stocking away money in retirement accounts (and possibly brokerage). That is a strong base.

      Now that you have that base, do your home work. Make an education bet on something with a bit more risk. You should feel some comfort in taking the risk given the foundation you’ve built for yourself.

      In 5 or 10 years, you may have a family and may not have the flexibility to buy that next cool company that makes people millionaires.

  4. Great perspective man! I got to FI mostly by ordering #3 (I mean it tastes good!), but yes like you said as long as you’re not throwing half your money down on bitcoin or playing blackjack, taking additional risk when you’re so young is a smart thing to do.

    And if you’re confident in your ability to continue to make more money in your day job, you have another layer of protection to recover if the riskier investment blows up.

    Great post!

    • Thanks accidental fire; I’m glad you enjoyed the post.

      I am not hating on #3. In fact, I order #3 occasionally as well.

      Confidence in my paycheck coming in from my day job was one the reasons I was comfortable taking risks. I am also young and know I have time to recover if I mess up.

      As an early retiree, you have proved #3 works. That is also awesome.

  5. Definitely needed to here this! Im 27 and have been putting most of my extra money into VTSAX for the last few years.

    I’m looking forward to doing a house hack in 2018 and continue investing in cryptos (when it makes sense) and other +EV investments.

    Working at a 9 to 5 for even 2-3 more years sounds awful. I’m ready to speed up my journey to FI!

    • Gary – sounds like you are doing a lot of things right and have built yourself a great base. Sprinkle in a bit of risk and you may very well save yourself a few years.

      Love that you are considering house hacking. This is a great way to boost your savings rate, build equity and get paid to own an asset that generally appreciates over time.

  6. Love the push for younger folks to take on a little more (calculated) risk. Thought of your blog when I read a Huffington post hit-job about how the millenial generation is totally boned – can’t be doing THAT badly if a guy in his late 20s is able to purchase multiple properties…

    I’m a 1/2-the-time-order-#3 kinda guy (401k and other assorted retirement accounts) and 1/2/-the-time-ramp-up-with-calculated-risk. I figure 60-year-old me is set that way, but hopefully 40s-me will be very, very well off.

    Great post man –

  7. Great points here. It does take effort to educate yourself in other forms of alternative investments and most people don’t have the interest or time to do that. #3 is the path of least resistance. But a little more work and effort can generate higher returns and compress time.

  8. I’m sticking with #3 for now because it’s tried and true. I have only been investing since 2013 and have not experienced a market crash yet, so I don’t know how I’ll behave when one inevitably comes. If I can make it through the next bear market without being too emotional, I’ll consider adding on more risk. I should still be young enough at that point to change strategy.

  9. As a young buck with an asset allocation of 99.46% in stocks, 0.54% in cash, and 0% in bonds… this article spoke to me. I highly encourage your younger audience to distance themselves just a bit from good ol’ low-cost index funds and have a little bit of fun with their portfolio. They have plenty of time to recover the money, they can reach FIRE at a faster rate, and they learn valuable investing lessons along the way 🙂

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