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March 2006 |
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This is part two in a series in which Debt Matters is exploring savings plans for every decade of our lives. 
The Young and the Helpless?They might not have much, but twenty-somethings have the most powerful financial tool known to humanity: time. The average twenty-somethings' savings plan can be frustrating. For one thing, they start with three strikes against them. Usually, they are saddled with some college debt, their earnings potential is still very low and they are faced with a lot of things to buy like cars, homes and furniture. Is it any wonder that so many twenty-somethings enter the work force and log years at a desk only to find out they have gone backward, ringing up $10,000 in credit card debt? Nowadays, if you enter your 30s with no debt, you are to be congratulated. Make a goal for your 20s Nonetheless, Debt Matters thinks the goal should be more than to merely survive financially. In these years, saving anything is hard, but the potential upside is so tremendous that you can't pass up the opportunity. A typical goal could be to be out of debt and save $5,000, $10,000 or $15,000 for retirement by the time you are 30. It doesn't sound like very much but getting that head start makes a big difference. Consider that a 30-year-old who starts with $15,000 saved and adds $3,000 a year and earns 8% on average in a tax deferred account will have $738,730 at age 65. The same 30-year-old who makes the same steps without that $15,000 head start will only have $516,950 at 65. In this example, that $15,000 saved in your 20s resulted in $221,780 in retirement funds! That is the power of time. And twenty-somethings have more time than anybody else with a steady income. So, how do we reach our goal? Another asset twenty-somethings have is energy. They can work an extra job. They can work late or overtime. They can change their oil and wash their cars themselves. They can clean their own home, instead of paying for a cleaning service. They can postpone buying a nice car or furniture. This resiliency that comes with youth can be a huge financial asset and help make that $10,000-$15,000 difference. Plus, you may get some help from your company. If they offer a 401(k) with a matching contribution, you should do almost anything to contribute enough to get the match — none of us is rich enough to pass up free money. Another way twenty-somethings will be successful is to aggressively build their financial savvy. Reading a few books and a lot of articles in your 20s can make a big financial difference when you reach age 30. Twenty-somethings should spend some of their youthful energy learning and putting together a plan that will enable them to take advantage of all the time they have ahead of them. |
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