The patterns we set now will set the tone for success or failure later in life. Here are five money habits to start in your 20’s.
Your high school graduation is usually when it all starts. Someone mentions the notion of retirement to you, and you tell your friends that you will worry about it when you graduate college. After all, you have to pay your way through school and every little helps.
Before you graduate college, you fall in love.. You find yourself not only planning for a graduation but also focused on a wedding.
Not long after that wedding you are house hunting, followed by pregnancy. Before you know it, you have two kids under your belt and are looking for a bigger car. In the process of finding the car, you get sucked into a car payment and voila.
Saving for your retirement seems to get pushed aside, and the thought of college funds for your children is a distant wish.
20 years later, you are in your early 40’s and you can’t believe 20 years flew by quite that fast. The idea of saving for retirement is still somewhat fresh, but it’s not the right time to start. Yet anyways. You have teenagers that are going to be driving. Your insurance rates are sky high and your oldest is already putting in college applications for after their high school graduation.
Fast forward many years – you find yourself in your early 50’s. It’s at this time that you sit down and say to yourself “Crap. It’s too late now. What the heck do I do?”
My message: Don’t let this happen to you.
There will always be some demand for your money. You may keep telling yourself “once I get past…. then I will….” …. In reality, things pass, new things come up and the cycle starts over and over again.
You are smart though – you may have already started something, perhaps you carried on saving for a while! But then something interrupted your efforts and you put them on hold.
Perhaps you started, and you didn’t get the results you wanted to see! You assumed that the money would grow faster, you didn’t realize that compound interest, over time, would make it so profitable 30 years from now.
Here’s a little secret though: it’s all dependent on you.
I started planning for retirement when I was fresh out of high school. My parents were not on board. I recall that conversation with my dad so vividly. He said it was too risky. A poor idea… the market is too unstable.
For me, it was too risky not to move forward. Twenty years later, I am thankful for following my gut instincts. I may not have known as much then, but I did know that I would probably look back in regret had I not done what my gut told me to do.
5 Money Habits to Start in your 20’s
Think about setting good money habits in your 20’s. And if you are far past your 20’s, then help your children set those money habits. Here are some foolproof ways to get started in your 20’s ~
1. Save 10%: Starting to save in your 20’s, affords you the opportunity to put away a mere 10% of your income annually. If 10% sounds like too much, just remember that the number will probably go up if you wait. Automate your saving and make it an automatic withdrawal that comes out the same day every month. Try to increase by 1 or 2% each year (as you likely will have raises that can counteract that!)
2. Get your Employer’s Match: Vanguard says that 49% of the employers using it’s plans provide some type of a match (this is as of 2014 — so potentially more now that we are in 2018). If you work for a company that falls in that percentage, then invest at least enough to earn the match. If you aren’t sure, Human Resources is a great place to ask.
If your employer offers a 2% match, then you might just have to put 2% of your income into a 401K or more.. (depending on if your employer matches at a 100% rate).
3. Start a Roth IRA or 401K: I’m no expert.. but these are both great places to start. Traditional IRA’s offer tax deferred savings – which essentially means that you won’t have to pay tax on contributions made now. You will, however, pay tax on all withdrawals in retirement.
A Roth IRA, on the other hand, is funded with after tax dollars. The Roth is a better option if you start in your 20’s — because your income will likely grow larger between now and your retirement age. One of the best solutions is to start a Roth IRA, and a 401K — because you will have the diversification you need (a Roth 401K has fewer investment options).
4. Look at Companies that allow a Reasonable Minimum: When I started, I could have gone with larger companies. As a young 18-year old, I did not have much to offer in a start up fund. Thankfully USAA helped me begin (but I also opened with another company too) and allowed me to start with a set investment per month that was affordable. Once you start getting ahead and making more, you can choose another company to move to, and a funds manager that will handle your investments for you if you wish to take that route.
5. Max Out: It’s important to find out what the max contribution to your 401K is. Contribute enough to earn the match, then sock the rest in your Roth IRA. Then, top off your contributions. A Roth IRA has a maximum contribution amount as a single, but if you have an investment advisor they can keep you abreast of those details when you sit with them.
It’s scary – starting out.. you may have questions, doubts, fears – insecurities. But in the end, what’s important, is that you start.