Good news for 20-somethings. If you want to retire rich, time is on your side! Take four simple steps now, and you will be on your way.
1. Save first. Before you do anything else with your paycheck, put part of it into savings. Have as your goal to save 10, 15, even 20 percent of your earnings. Save on a regular basis, and it will become a habit like brushing your teeth or working out. After you save first, use the money that’s left to live on and pay down your debt. If you come up short, don’t skip your savings contribution. Instead, think of ways you can simplify your lifestyle so you can live on less.
2. Make the most of your retirement plans. If you have a retirement plan at work, max out your contributions to it as soon as you can. Make this your top priority—ahead of buying a new car, a house, or saving for your kids’ education. As part of your retirement savings, take advantage of a Roth IRA. The big advantage of a Roth is that you can withdraw the money tax free at retirement. Contributions to a Roth IRA are taxable at the frontend—but you’re probably in a lower tax bracket now than you’ll be later in your career.
3. Minimize student loan debt. Student loan debt is a huge issue for 20-somethings. Before you take on more debt to pursue that graduate degree, evaluate if the earnings you expect to gain from the degree will offset the added debt. You might opt to defer graduate school for a few years instead, while you pay down your current student loans.
4. Don’t get burned by ‘hot’ stocks. Avoid the temptation to gamble your hard-earned money on the latest hot-stock tip from your buddy. You’ll be throwing away your money. You’re much more likely to come out ahead by investing consistently over time in a well-diversified portfolio that is indexed to market returns, rather than trying to beat the market. And remember to rebalance your portfolio at least annually.
Here’s to retiring rich. You can do it!
As part of Money Smart Week, we asked the Michigan Association of Certified Public Accountants to help us break down some of the personal finance issues that bog us all down. Money Smart Week runs through April 12. This is part of a series of articles you'll see all week.