You have an advantage if you're in your twenties and start saving and investing versus if you wait until you're in your thirties or forties. For example, someone in their thirties must invest twice as much as someone in their twenties to have $1 million at retirement age. As you invest, compounding interest works in your favor. Assuming average yearly returns of 8 percent, you'll have over $700,000 by the time you reach age 65 if you start investing $200 every month beginning at age 25. If you're unsure of where to get the money to save and invest, creating a personal budget first can help you evaluate your finances.
1. Sign up for the 401(k) or retirement plan offered by your employer. Many employers offer a company match, which is essentially free money for your retirement account. Open a traditional or Roth IRA if your employer doesn't offer a 401(k) or retirement account option. Place as much of your gross pay into the retirement account as you comfortably can. Personal finance author and columnist Liz Pulliam Weston, in "Your 20s: Planning Pays Off Richly," suggests to aim for around 10 to 15 percent of your gross income.
2. Take more of an aggressive stance when choosing funds for your retirement accounts and investments. Since you have decades before you enter retirement or need the money from your investments, take full advantage of stocks, stock mutual funds and exchange-traded funds (ETFs) that have potential for growth. In fact, Weston recommends that a person in her twenties place as much as 80 percent or more of her retirement funds into these aggressive stocks and funds.
3. Divert a portion of your paycheck to safe, liquid investments. For instance, open a certificate of deposit (CD), high-yield savings or money market account, or even a regular checking or savings account. Arrange for your bank or credit union -- especially if you take advantage of your employer's direct deposit option -- to automatically deduct a small portion of your paycheck into one of these accounts. Developing this regular savings habit allows you to amass an emergency fund for unexpected expenses, such as car repairs or medical bills, instead of tapping into your retirement account.
4. Pay off high-interest, revolving debt accounts, especially those with large balances. This includes credit cards and auto loans that may have interest rates as high as 18 percent or more. Make more than the minimum monthly payments on these accounts to save on interest charges. The faster you pay off credit cards and auto loans, the more money you'll have to divert to savings and investments.
5. Buy health insurance. Even though you're young, you're not invincible, and accidents can still happen. Medical and hospital bills can start to accrue, resulting in a financial disaster. Purchase health insurance from your employer or look for an individual policy if he doesn't offer insurance. The benefit of health insurance is two-fold: it protects you in case an emergency does happen, and it protects your bank account and any savings you've amassed.
6. Build and improve your credit. Bring accounts that may be 30 or 60 days past due current. Keep all accounts, such as credit cards, auto and student loan accounts, in good standing with the creditor to steadily build your credit history. If you have no credit history or you need to improve it, apply for a secured credit card. A secured credit card issues you a line of credit equal to the amount of a security deposit you place with the issuing bank or credit card company. You use your card just as you would a regular credit card, making payments on time every month. Building and improving your credit history can increase your credit score, which can qualify you for lower interest rates when applying for mortgages and other loans.
- Consult a financial professional to help you decide on appropriate investments.
- MSN Money; Your 20s -- Planning Pays Off Richly; Liz Pulliam Weston; June 2009
- Kiplinger; 10 Financial Commandments for Your 20s; Erin Burt; January 2009
- Wells Fargo: Rules to Save By
- FNCiMag.com; Your Finances -- A Guide for Your Twenties; Clarky Davis; October 2010
- Dummies.com; How to Invest If You Are in Your 20s; Ryan Zacharczyk
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