By Carol Perry
It is the first month of the New Year so many people of all ages will make a resolution to become more financially fit. Time frames, objectives and risk tolerance can change a lot in a person's life, so I thought we would start the new year with a series of articles that will address financial issues for different stages throughout your adult life.
This first article will focus on your 20s, when you have gained the education and/or skills you need for the career that you have chosen. Now that you are earning money, you need to learn how to handle it.
Why is it important to start in your 20s? There is no better time to start putting your money to work so you can achieve your financial goals throughout your life.
I wish I had been looking at my long-term goals while I was young, instead of looking at things day-to-day. Developing good spending and saving habits and learning to budget and invest during your 20s can help prevent needless debt. You can also put away money for the things important to you, and take advantage of the power of compounding earnings to amass a fortune for your future.
In fact, compounding earnings is so powerful that those who start saving for retirement in their 20s can amass large nest eggs with relatively little effort, as long as they invest regularly.
I know it's hard to think about retirement when you are so young. I remember just thinking about how I was going to pay the rent back then, but I sure wish I knew then what I know now. For example, if I had invested $2,000 when I was 25, and did that every year for eight years and never invested another dollar, I would have more by the age of 65 than a 35-year-old who invests 2,000 a year for 32 years.
That is the power of time on your investment dollar. The sooner the better, no matter how much you put away. Use dollar-cost averaging, and put away money every month.
Identify your short-, medium- and long-term goals. The first step in financial planning is to know what you are saving for.
Your short-term goals are generally five years or less, like a wedding or buying a car. Your medium goals would be things like owning a home, or perhaps you want to pay off your student loans.
Finally, your long-term goals are things like retirement and travel. Estimate how much money you will need to meet each of your goals and then determine how much you need to save each month to reach that goal within your time frame.
Budget to meet your goals. When you have a set budget and know how much you bring home and how much you spend, it is more likely that you will be able to save.
This is where I see a lot of young people getting into trouble. They don't really know what they bring home versus what they spend each month. Credit cards compound the problem. Don't use credit cards unless paying them off each month is in your budget.
When you have set your goals and a budget, now you need to pick the appropriate product to invest in. It would be wise to put money in CDs or a money market for short-term goals, while medium- and long-term goals can be in the stock market.
Historically, the stock market has outperformed any other type of investment, but its volatility makes it less then ideal for short-term goals
For retirement, find out if your employer offers a 401(k) or other tax-deferred savings plans. If they do, 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.
Many employers will match all of part of your contributions, which will result in bigger gains for you. If you are just entering the job market, look for employers who offer a retirement or pension plan as one of their benefits.
There is a wealth of information on the Internet as well as access to financial planners in our area. It has never been easier to be a smart investor, so invest wisely and invest early. When my clients ask how much money should they be saving for retirement, I tell them as much as they can. I have never met a person who complains that they have too much money in retirement.
To learn more about investing in your 20s, contact one of our advisers at 841-4277. Happy New Year to all!
• Carol Perry , of Carol Perry and Associates, has been a resident of Northern Nevada since 1983.