Financial Advice for Your 20s
Follow these financial tips to make smart financial decisions
Financial Planning Throughout Your Life This is the first in a series of articles about financial planning throughout your life. This first article focuses on your twenties when you've gained the education and/or skills you need for the career you've chosen, and you're earning money and learning how to handle it.
Even if you're not in your twenties, if you're just getting started on financial plan, the advice offered here is still valid for you. You won't have quite the time advantage of those in their twenties, but it's never too late to start.
Why it's important to start in your twenties
There's no time like your twenties to start putting your money to work for you so that you can achieve your financial goals throughout your life. Developing good spending and saving habits, and learning to budget and invest during your twenties, can help you prevent needless debt, put away money for the things that are important to you, and take advantage of the power of compounding to amass a fortune for your future.
In fact, compounding of earnings is so powerful that those who start saving for retirement in their twenties can amass large nest eggs with relatively little effort, as long as they invest regularly.
For an example of the power of compounding, take a 25-year-old who invests $2,000 a year for eight years and never invests an additional dollar after the age of 33. He or she will earn more by the age of 65 than a 35-year-old who invests $2000 a year for 32 years, even though the 35-year-old invests four times as much.
Identifying Your Short, Medium, and Long-Term Goals
The first step in financial planning is to identify your goals. Your short-term goals (five years or less) might include a wedding, a honeymoon, furniture, a new car. After that, you need to think about medium-term goals, such as owning your own home and financing your kids' college educations. Finally, list your long-term goals, such as retirement and travel.
Estimate how much money you'll need to meet each of your goals. There are a variety of online savings calculators you can use to determine how much you need to save each month to reach that goal within your time frame.
Budgeting To Meet Your Goals
When budgeting, set aside money to go towards your short-term, medium-term, and long-term goals. Try not to sacrifice one for the other. For more information on budgeting, see "Budgeting 101".
Investing To Meet Your Goals
It may be wise to invest in Certificates of Deposit or Money Market Funds for your short-term goals, and the stock market for your medium and long-term goals. Historically, the stock market has out-performed any other type of investment over time, but it's not for the faint of heart. Its volatility makes it a less than ideal investment for short-term funds unless you have a very high risk tolerance.
Find out if your employer has a 401(k) plan or other tax-deferred retirement plan, and if so, take advantage of it. Your contributions will be made with pre-tax dollars and taxes on earnings will be deferred until you withdraw them during retirement. Even better, many employers will match all or part of your contribution, which results in huge gains for you.
With the wealth of information available on the internet, it's never been easier to learn how to be a smart investor. Stocks and mutual funds can be thoroughly researched with a few clicks at sites like Morningstar.