3 Personal Finance Tips for 20-Somethings

When you're young, your financial future is a blank slate. Here's how to give yourself a great start.

Aug 11, 2014 at 7:20PM

If you're under 30 and already planning for your financial future, you're ahead of the pack. Basically, at this point in your life, you should think of your personal finances as a company's balance sheet. You need to maximize your assets by saving and investing, and control your liabilities by using credit and debt responsibly.

Here are three simple yet important personal finance tips to adopt while you're young. If you can get these three things right early on, you'll be well on your way to a bright financial future.

Know where you want to be

The best thing you can do is set goals for yourself. If you're just aimlessly saving money whenever it's convenient, it's easy to break that habit.

Money Pd

Your goals don't need to be incredibly specific, but they should be clearly defined and reasonable. For example, "I want to open an IRA and contribute $3,000 this year" is a far better goal than "I want to get better at saving money."

You should set specific goals related not only to savings, but also to debt ("I want to pay down 50% of my credit card debt this year"), spending ("I want to spend 20% less eating out"), and any other aspect of your financial life you need to get in order.

Use the right kind of debt

Before you start saving money or investing, you have to get your debt in order. Not all debts are created equal, and there are three main types.

The best kind is debt with low interest that finances something that will (or should) increase in value over time, aka an "appreciating asset." A mortgage on a home is the most common example of this. A loan that you've taken out to start or expand your own business can also qualify as good debt.

The second category, which I like to call "acceptable" debt, carries relatively low interest and finances something worthwhile, like a car. A car gets you to work, allowing you to earn money, so it's an acceptable form of debt to have. Student loan debt also falls into this category. It's a relatively low-interest "means to an end."

Finally, bad debt is what we want to avoid. This includes high-interest and unnecessary debt, particularly credit cards. Credit cards can charge interest rates well in excess of 20%, and "starter" cards designed for younger people tend to charge some of the highest rates.

Even if you're an excellent investor and can earn consistent 10% annual returns on your investments, you'll still be losing money overall if you have high-interest credit card debt. Paying off your credit card balances should be priority No. 1, and it doesn't make sense to invest any new money until your debt is in check.

It's generally fine to invest while you're paying down the "good" kinds of debt, so long as your interest rate is reasonably low and you don't foresee any trouble making payments on your loans. If you can borrow money to buy a house at 4% and your investments average a respectable 8% annual return, you'll come out ahead in the end.

Use your biggest investment weapon

As a younger investor, you have a powerful tool at your disposal: time. The power of compound interest has been referred to as "the eighth wonder of the world," and it truly is. You also have the power to let your money compound tax-free in an IRA or 401(k).

If your employer offers a 401(k) with matching contributions, that should be your top priority. Contribute as much money as your employer is willing to match. After you've maxed out your employer match, an IRA is a good choice for any extra savings, as it gives you a much wider range of investment options to take advantage of. There are two main types of IRAs: traditional and Roth -- read this for a thorough discussion of how each type works. Both 401(k)s and IRAs allow your money to compound tax-free, which lets you take full advantage of the power of compound interest.


Let's say you want to retire with $1 million in the bank at age 65. Your goal may be higher or lower, but let's stick with a nice round number for the purposes of this example. We'll also assume your investments will appreciate at an average of 8% annually, which is actually conservative on a historical basis.

If you start investing in an IRA or 401(k) at 25, you'll need to contribute $322 per month in order to achieve your million-dollar goal by retirement. If you wait until you're 30 to start, your monthly savings requirement jumps to $484. Starting at 35, you'll need to contribute $735 per month, or 2.3 times the savings you would need if you started at 25. This demonstrates the incredible power of compound investment returns, and you need to use it to your advantage.

A final thought

The average American between the ages of 25 and 32 has $12,000 in retirement savings, and the average 33- to 44-year-old has $61,000. According to Aon Hewitt, the average 65-year-old needs 11 times his or her annual salary in order to retire comfortably and make their money last, so you should aim to save much more than average.

If you simply follow these easy personal finance tips, you should be able to easily surpass those figures and set yourself on the path to financial freedom. The most foolproof way to create a stable future is to take control of your financial destiny and save for yourself. That way, any other sources of income down the road, like Social Security, should seem like a nice supplement to your personal nest egg and will not dictate your standard of living as you get older.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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