Updated: 10/24/2011 11:59 AM ET|
Your 20s: Planning pays off richly
As you sketch out your financial plan for your 20s, consider this advice:
Live cheaply as long as you can. Newly minted adults tend to overestimate how far their paychecks will go and blow too much on apartments, cars, wardrobes, eating out and all the other trappings of grown-up life. A smarter approach: Keep living like a broke college student for a few more years. You'll get a better handle on what you can really afford and be able to free up more money for real adult goals, like retirement and health insurance. Speaking of which . . . .
Get health insurance. You're one accident or illness away from financial disaster if you don't have coverage. If your employer doesn't offer insurance, try to buy an individual policy. Opting for a high deductible can keep the monthly premium down but still offer you protection from catastrophic medical bills.
Shovel money into your retirement funds. If your employer offers a 401k or other retirement plan, sign up for it and contribute as much as you can. If not, start contributing to a traditional or Roth individual retirement account. Aim to put aside 10% to 15% of your gross pay. Contributing every dime you can now will give you flexibility when you're older, either to retire early or to cut back your contributions so you can cover other expenses (like future children's college educations) without derailing your retirement plans.
Take a chance. You're young, so you have decades to ride out the stock market's ups and downs. Consider putting 80% or more of your retirement funds into stocks or stock mutual funds to take full advantage of their potential for growth. If investing baffles you, consider opting for a "lifestyle" or "target maturity" fund: You pick a target retirement date and let experts do the rest.
Be strategic about debt. Pay off those credit cards and resolve not to carry balances in the future, because the interest you pay is money down the drain. Then focus on paying off private student loan debt, which typically carries a variable rate. But don't necessarily rush to pay off federal student loan debt or mortgages, which tend to be relatively cheap and tax-deductible. Instead, make sure you're contributing the maximum to your retirement accounts and have your other financial bases covered before accelerating payments on those debts.
Pay attention to your credit scores. Credit scores are the three-digit numbers lenders (and others) use to help gauge your creditworthiness, and they're key to your financial life. You'll pay higher interest rates and have more trouble getting loans if your scores are poor, and bad credit can cost you jobs, apartments and higher insurance premiums. Pay your bills on time, keep credit card balances low, and apply for credit sparingly to keep your scores in good shape.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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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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