3 Smart Money Moves in Your 20s | American Funds

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Creating a Financial Plan

JULY 13, 2017

Investing in Your Future:
3 Smart Money Moves in Your 20s

 

Now is a good time to establish smart money habits that will last a lifetime.

So where do you begin?

“You should patiently build a financial situation to the point where you can have things — like a house and a car — while also maintaining a long-term financial plan,” says Patrick Payne, assistant professor of finance and financial planning at West Carolina University.

Here are three ways you can get started.

1. Set Up an Emergency Fund

To cushion the financial blow from a possible job loss or medical emergency, Payne recommends you:

  • Build an emergency fund with enough cash to cover six to 12 months of living expenses. While that may seem overwhelming or simply unrealistic, just get started. Set a goal for yourself, not a deadline. It will likely take time, but will be well worth the effort.
  • Pay monthly credit card bills in full and focus on accumulating assets for at least a few years.
  • Think twice before purchasing a big-ticket item like a home or car.

2. Start Saving for Retirement

“When you’re in your 20s and just getting started, retirement may feel light-years away,” says Ken Burdick, senior product specialist at American Funds. “The trick is to stop thinking of [saving for retirement] as an ‘optional’ part of your budget. Treat it like any of your other mandatory bills.”

The vast majority of millennials are already getting the message. According to American Funds’ “Wisdom of Experience” survey, eight in 10 believe that saving a portion of their monthly income will play a key factor in helping them achieve a secure retirement.

  • Experts advise setting aside 10% to 15% of your salary for retirement savings, while Payne advocates contributing at least enough to your 401(k) to be eligible for your company’s match.

If you don’t have an employer contributing to your retirement savings, you should consistently allocate a portion of your earnings to an alternative retirement savings option such as an individual retirement account (IRA). With many years ahead in which to save, young investors can focus on growth-oriented investments and take on a bit more risk than those closer to retirement.

3. Stick to a Debt Repayment Plan

Getting a handle on debt in your 20s is important so that loan obligations don’t prevent you from making other investments later in life. So whether they are related to college, credit cards or a car, work out a way to make your payments on time.

  • Worried about falling behind? See if you’re eligible for some form of relief. Under certain circumstances student loan borrowers can extend their repayment period up to 25 years or make income-based repayments, Payne explains.
  • If you can comfortably meet your monthly loan obligations, look into paying off one or more of them earlier if it minimizes the interest you are being charged.

Time Is on Your Side

The principle of compounding interest works against you if you’re drowning in debt, but it can also work to your advantage the earlier you begin saving and investing.

“The young should take advantage of the extra time they have to invest,” Payne adds. “If they do, they will have far better investment results than they could get if they wait to invest later in life.”

 

What's next: 3 Smart Money Moves in Your 30s


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