Investment Concerns by Age / Part 1: 20-30's - Hilton Head Monthly, November 2008
Our financial activities, and the sphere within which we conduct them, are a potent way we touch and interact with the rest of the world. While a chronological survey can be simplistic, there are issues and strategies that persist throughout a lifetime, sharpening and fading from focus in different decades, as well as some financial concerns that are very specific to a particular period in life.
20’s and 30’s
Saving early and consistently should be the mantra for these decades; for a home, cars, education, and retirement. If you contribute $4,000 a year into a retirement savings account at age 22, in 40 years at 8% your account will be worth a million dollars. However, if you put off savings for just 10 years, be prepared to more than double that annual contribution, to about $8,800 per year, to make your million. At this age it’s important to participate in your company 401(k) or 403(b) plan and contribute as much as you can, 10 to15 percent of your salary if possible. Open a traditional or Roth IRA if you qualify, Remember, IRAs permit a penalty-free first time home buyers withdrawal, subject to certain conditions, so it can help with a home purchase, a typical concern for young people in this age group.
Learn the advantages that a long-term perspective gives an investor in the stock market. You’ve probably got more time than money at this stage, so consider riding out the ebb and flow of the market and invest a healthy proportion of your retirement funds in stocks or stock mutual funds, taking full advantage of their potential for growth. Remember to diversify, and avoid the lure of speculation.
Participate in your employers’ health insurance plan; if they don’t offer one purchase some kind of coverage yourself. Consider a higher deductible policy with lower premiums, possibly in conjunction with a Health Savings Account. This is an underinsured age group, and often totally exposed to the financial consequences of an unexpected illness or accident.
Establish an emergency fund with two to three months living expenses in a liquid account like a money market fund or CD. This will avoid having to fall back on credit cards and loans from 401(k)s when unexpected financial needs and emergencies arise.
Establish good credit early, don’t miss a payment, and keep your limits high and your balances low. Credit card interest is money lost, and credit card spending gets the most well-intentioned folks into trouble. Marriage and children are more the norm in this age group, bringing extra income, extra expenses, and the challenges of balancing two often very different attitudes toward money and spending. Increased income brings more responsibilities; mortgage, taxes, insurance, children’s education, leisure and travel. If you have lingering debt from your 20s, get rid of it now. Proper insurance coverage becomes essential. You now have a home and automobiles, and need adequate homeowners and auto coverage, possibly flood insurance, and various types of liability. Life insurance is an important tool at this time to assure a stable financial future for a surviving spouse and children. Don’t neglect disability insurance, which protects your family if injury or illness prevents you from earning a living. This is actually more likely in this age group than premature death, so this type of insurance ranks high in importance for this age group. It’s time to begin saving for your children’s education, if you haven’t already started. Evaluate your State’s pre-paid tuition plan, if you already know which state schools your kids will attend. Review your State’s 529 plan, which will permit state tax free, as well as the federal tax free withdrawals, if used for allowable educational expenses. You can use any 529 plan to pay for schooling in any state, although you will forgo the state tax benefits. Look for low plan and fund expenses and diverisfied fund choices, and try to avoid plans with sales charges and fees.