Finances and money obligations change throughout life. A 30-year-old has different goals and money concerns than a 70-year-old. With this in mind, the next several columns of The Money Shot will focus on each decade of life providing finance tips for that phase.
This week, we focus on our 20s. What a fun time with very few obligations. You get your first job making some decent money, move into an apartment with some friends, and it’s party time! The credit cards are smoking from overuse. Clothes and entertainment are the top priorities.
However, with just a few minor adjustments to their budget, a 20-something can change their life forever. They can do this by saving early. Time is lost forever. Don’t pass up this opportunity to save a little and let it grow. A 22-year-old that saves just $200 per month for 45 years will have $750,000.
I hear what you’re thinking right now. I’ll wait till my 30s to start saving when I make more money. By waiting 10 years, a 32-year-old needs to save more than double what the 22-year-old saves in order to have the same $750,000 at retirement. Do not pass up the opportunity to save in your 20s!
My recommendation is to save at least 15 percent of your income.
Start saving first with your employer savings plan. Contribute the minimum amount to get the full company match. This is typically six percent of pay. Then invest up to $5,500 into a Roth IRA. Those two actions alone should set up a nice retirement for anyone in their 20s.
The next tip for this young generation is to manage debt. Obviously, stay away from credit card debt. If you have it, stop going out until it is completely paid off. Review your student debt to make sure you have the right repayment plan based on your circumstances. There is the typical 10-year student loan, but if you can’t afford the payment then look into an income-based repayment plan or extend the term to 25-years to lower the monthly payment. Check out finaid.org for more information on repayment options.
The final tip for people in their 20s is to start an emergency fund. Try to save up a few thousand dollars in a savings account. This money is only to be used in case you lose your job, have an expensive car repair or some other true emergency. This stash of cash will keep you from using credit cards to pay any unexpected bills.
These are the three main things you need to do in your 20s. Save 15 percent of pay, manage debt and start an emergency fund. It’s a pretty short list. That’s on purpose. I want all of you 20-somethings to take action and not be overwhelmed. These are all doable, so just go get it done!
Steve Doster is a Certified Financial Planner™ professional providing commission-free financial advice for do-it-yourself investors. You can reach Steve at Doster Financial Planning by phone 619-688-1192 or email steve@dosterfinancialplanning.com. You can also follow Steve on Facebook, Linked In, Twitter, or blog to get more personal finance advice and tips.
