Money magazine’s 101 Ways to Build Wealth package offers blueprints for the different stages of your life on how to achieve real financial security. In tips #1 through #27, we offer advice for 25- to 34-year-olds.
Just starting out? Now’s the time to create a solid plan for investing and saving.
WHAT YOU NEED TO KNOW
Savings goal at age 30: 0.6 x your incom<br />e
Biggest cash drain: Student loans and other deb
Biggest challenge: Overcoming fear of investin
Biggest opportunity: Lots of time for your money to compound
1. Be courageous. Nearly 40% of Gen Y-ers say they’ll never feel okay investing in stocks, MFS Investment Management reports. Take note: Since 1926, a portfolio mostly in stocks has never lost money in any 20-year period while averaging gains of more than 10.8% a year, vs. 4% for bonds.
Get an age-appropriate mix with the target-date fund in your 401(k) or MONEY 70 picks Vanguard Target Retirement 2050 VANGUARD TARGET RETIREMT 2050 FD VFIFX 0.1% or T. Rowe Price Retirement 2050 T. ROWE PRICE RETIREMENT 2050 TRRMX 0.22% .
2. Go for a Roth 401(k). The Roth advantage: You save with after-tax dollars, so, unlike a regular 401(k), you won’t pay income taxes on withdrawals. That’s a good deal if you’ll be in a higher tax bracket at retirement, as is the case for many young investors.
Four in 10 large plans now offer a Roth option, Aon Hewitt says. To hedge your bet on future tax rates, split your contributions between a Roth and a pretax 401(k).
3. Don’t cash out. More than half of workers in their twenties who leave a job do not roll their 401(k) into an IRA or their new employer’s plan, says Aon Hewitt. Bad move: On a $10,000 balance, you could be left with just $7,000 after taxes and penalties. If, instead, you keep that money growing at, say, 6% a year, you’ll have an extra $100,000 or so by the time you retire.
13. Buddy up. A new study from Columbia, Harvard, and Chilean researchers found that when peers monitored one another’s savings progress, average balances doubled.
PeerPressure, a free iPhone app, makes it easy to create goals and share progress with your friends via social networks and e-mail.
14. Sweat the small stuff. If you carry multiple credit card balances, you’ll save the most money by paying off your highest-rate plastic first, right? Wrong.
Two Northwestern University professors have found that people who focus on their smallest debts before tackling bigger, higher-rate loans are more successful at erasing debt. The psychological boost from eliminating a loan entirely gives you the mojo to keep debt paydown going.
15. Bookmark this! The more you know about personal finance, the more you’re likely to save, research shows.
Two online courses can help: Fundamentals of Personal Financial Planning from the University of California at Irvine (ocw.uci.edu/courses/course.aspx) and Khan Academy’s personal finance class (bettermoneyhabits.com).
Your employer’s retirement savings plan is a wealth builder’s best friend. To make the most of the relationship:
16. Sign up (Duh). Roughly a third of eligible employees ages 25 to 34 don’t save in their 401(k), Vanguard says. Don’t be one of them. All else being equal, 10 years of saving starting at 25 trumps 30 years of contributions starting at 35.
17. Escalate automatically. In half of large company 401(k) plans, you can elect to automatically boost your contribution each year, typically by one percentage point. Research by Shlomo Benartzi at UCLA and Richard Thaler at the University of Chicago shows that workers who automate end up saving a lot more.
18. Go beyond the limits. Plans often cap auto-escalation at the company match (typically 6%). That’s not enough. Once you hit that limit, keep boosting your percentage each year — timing it to your raise makes it painless — until you hit the contribution maximum.
THE POWER OF AN EARLY START
How much you’d have at 65 if you save $5,000 a year from ages:
25 to 35: $602,100
35 to 65: $540,700
25 to 65: $1.1 Million
Note: Assumes 7% average annual returns. Source: J.P. Morgan Asset Management
19. Pin it, don’t buy it. Anticipating a purchase makes you happier than actually acquiring the item, researchers at the University of Missouri have found. So cut your spending by creating a wish list at wishlist.com or by pinning the objects of your desire to a board on Pinterest. Savor the moment — and then move on.
20. Remove temptation. De-list yourself from daily deal sites like Groupon and flash sales sites like Gilt Groupe (unroll.me makes it easy). A Lightspeed Research survey of consumers who use these sites found that 60% said they spend additional money beyond the value of the deal, and a quarter allow deals to expire before using them.
A better way to nab a great price? Use a price-comparison app like RedLaser.
21. Buy recently used. $9,000. That’s how much more you’ll shell out in total costs over five years if you buy a new car vs. a similar three-year-old used one, reports Edmunds.com.
Baltimore financial planner Tim Maurer suggests going with a car just coming off a two-year lease: “It will be in good shape because the lease agreement would require regular maintenance.”
22. Have two to four cards, but use one. You want more than one credit card, says Ulzheimer, because scorers look at how much credit is available to you — in relation to how much you’re not using. Make one your primary card and ice the others. Then ask for a modest increase in your credit limit every 12 months — but don’t use it!
23. Always pay on time. Late payments weigh down your score faster than you can say FICO. If you do slip up, call the issuer and ask to have the fee removed from your record — known as a goodwill deletion.
24. Pay down in the right order. Knock off credit card debt, then start paying extra on installment loans. “Having $700 in credit card debt can cause you bigger problems than having $70,000 in student loan debt,” says Ulzheimer.
YOUR CREDIT SCORE
The higher your score, the lower the interest rate you’ll nab on a mortgage or car loan. Best to nail it when you’re younger and your credit score is easy to change, says expert John Ulzheimer.
$250,000, 30-year mortgage
FICO credit score of 660; total interest paid: $171,260
FICO credit score of 760; total interest paid: $140,403
Savings in interest paid with higher score: $30,857
$20,000 new car loan (36-month term)
FICO credit score of 660; total interest paid: $2,181
FICO credit score of 760; total interest paid: $1,056
Savings in interest paid with higher score: $1,125