Updated: 10/24/2011 11:59 AM ET|
Your 20s: Planning pays off richly
You're poorer than you'll ever be again, but you can lay the groundwork now for a prosperous future. Here's what you need to know to get off to a good start.
If you're in your 20s and broke, you're in very good company.
Incomes are low, debts can be high, and many households headed by 20-somethings live on the financial edge, according to the Federal Reserve's 2007 Survey of Consumer Finances, released every three years.
- The median income for families headed by people aged 20 to 29 was just more than $30,000 in 2007, according to Federal Reserve statistics, compared with medians of $54,000 for those in their 30s and more than $60,000 for those in their 50s. In inflation-adjusted terms, median incomes for 20-somethings didn't budge from their levels in 2004, the last time the Fed conducted this survey.
- Thirty percent of 20-somethings made $20,000 or less.
- 20-somethings were more than twice as likely as older folks to have a negative net worth; one out of four families headed by people aged 20 to 29 owed more than they owned. For those with a positive net worth, the median wealth was $7,060; including everyone brought down the median to just $6,400.
|Net worth by age group|
|Age||Median||Top 25%||Top 10%|
|20 to 29||$6,400||$35,000||$132,000|
|30 to 39||$51,200||$184,000||$436,000|
|40 to 49||$133,100||$371,000||$840,000|
|50 to 59||$229,300||$605,000||$1,350,000|
|60 to 69||$256,300||$710,400||$2,030,000|
- More than one-third of 20-somethings had education loans. The median amount owed to student lenders was $13,000, a sharp increase from the previous Fed survey in 2004, when the median amount owed was $9,200.
- One out of 13 families headed by 20-somethings was at least 60 days late on a bill. Only folks in their 30s had a higher delinquency rate, with 9% of that group 60 days or more late.
Get your act together now
But there is also good news if you're in your 20s: Time really and truly is on your side. If you get your act together now, you can achieve financial independence decades ahead of your peers who keep muddling from paycheck to paycheck.
Consider this: Someone who puts $4,000 a year into retirement accounts starting at 22 can have $1 million by age 62, assuming 8% average annual returns. Wait 10 years to start contributing, and you'd have to put in more than twice as much -- $8,800 a year -- to reach the same goal.
VIDEO ON MSN MONEY
The arcticle was merely using a nominal value to show the importance of compound interest. While some people can't save as much as others, the best advice anyone can give young adults is to pay yourself first (at least 10%) . If you made 4K in one whole year than you should have saved at least $400. I know what your thinking, "How do I save $400 when I have to pay for fast food, entertainment, beer, etc"? It's called living on a budget!
I'm 23, working on my PhD in EE and already maxing out my TSP contribution (Govnt equivalent to 401k) + some in a Roth IRA as well. It is definetly doable. However, most people would rather pay for the 1000 channel TV packages, expensive cell phone data plans, and a flashy car even though they all take you from point A to point B. People need to sit down and understand the differences between wants and needs!
I'm sure a lot of these younger people don't have enough education about saving, have no game plans and no coaches. No one taught me about it in school or college/university. I learned from a good friend (who is a multi-millionaire) a few important concepts that has help us out a ton! One of them being the Rule of 72...
Rule of 72: Take 72divide it by your ROR%, and than = # years it takes for your $$ to double(x2)
@3% (72/3=24) = in 24 years, $10,000 doubles to $20,000
@6% (72/6=12) = in 12 years, doubles to $20k, in 24 total, it doubles again to $40k.
@12% (72/12=6) = in 6 yrs $20k, in 12 yrs $40k, in 18 yrs $80k, in 24 yrs $160k.
This is also known as the "banker's rule", because the bank might give 3%, loan it out at 12%, make $160k, pay back $20, and keep $140k!
I'm 28 and I have a 401(k) at work (maxed out the match), and both my wife and I each have a Roth IRA. We currently save right around $500/month and have just over $40,000 in our retirement accounts. We have no debt (probably will end up with a mortgage soon though when we purchase a home, but no credit cards, no car loans, no student loans, etc.).
In our accounts, we have funds such as Fidelity Growth Fund, Invesco Van Kampen Equity & Income, American Funds Growth Fund of America, etc. All these funds since inception have 10%+ rates of return per year. All of these funds are great for me!
(This is not a solicitation and I am not suggesting these funds to anyone, I'm simply stating what I have personally. Please reach out to a licensed investment professional for a prospectus for all the information needed to make an educated decision)
<a href="http://www.afmanagement.co.uk/services/investment-planning">Investment Advice in East Sussex</a>
Someone who puts $4,000 a year into retirement accounts starting at 22 can have $1 million by age 62, assuming 8% average annual returns.
Please tell me what 22 year old has and extra $333 lying around to throw into a retirement fund... ha you're kidding right? I made maybe $4000 the whole year back in my 20s when attending college... oh and please inform me of a retirement fund that gives 8% annual returns... I swear MSN just pulls this stuff out of their **** for sh!ts and giggles. I know this is supposed to be informative....be realistic about it....
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