The early years of your adult life are some of the most crucial to your long-term financial success. Here are four things our experts want you to get right, so you don't retire with lots of regret:
Brian Stoffel: Though not as prevalent as it was before the Great Recession, buying your first home is still a common rite of passage for those having just entered the work force. But while it might make sense for some, there are three reasons most 20-somethings should avoid making this big purchase.
First, a house is often thought of as a great financial investment. It's not. A home may pay social and emotional dividends for the owner, but as Yale economist and Nobel Prize winner Robert Shiller has definitively shown, homes often have trouble keeping up with inflation.
Of course, you could argue that paying for equity in a home is better than "wasting" your money on rent. But that's only true if you're able to stay in your home for a long enough time. Unbeknownst to many 20-somethings, the amortization schedule for your mortgage payment is heavily front-loaded with interest payments. For most people, if you aren't living in your house for more than five years, all you're really doing is making rent payments to your bank.
Which brings me to my final point: Young people are mobile these days. Having put off getting married and having kids, many are free to take job opportunities wherever they crop up. Having to sell a house cannot only be a drag on that process, but it can cause you to cash out before ever realizing a profit.
Owning a home is better left for the days when you need a permanent residence and are settled within your community.
Jason Hall: It might seem smart to put off contributing to your company retirement plan until you're making more money. After all, you still need to build up savings and pay off your college loans, right?
Unfortunately, you're actually wasting the most valuable asset you have, and it's one that you can't replace: time.
The value of time -- not to mention your employer's matching contributions -- are worth more than you might realize. Here's a reasonable example. Let's say you're 24, you make $40,000 per year, and your employer will match up to 3% of your salary in 401(k) contributions. Let's also say that you can expect a 3% annual raise, and you average 7% in annual compounded returns, slightly below the long-term stock market average.
Let's compare those results to what happens if you wait to age 35, even if you "catch up" and contribute the exact same amount of money by age 65:
By waiting until you're in your mid-30s to start contributing, you leave potentially hundreds of thousands of dollars in returns on the table. Don't make the mistake of thinking the small amount you can contribute today won't make a difference, or that you can just make it up later. Time is the difference-maker. Use it wisely.
Matt Frankel: In addition to not saving enough money, one bad habit of 20-somethings is accumulating too much debt, something that can haunt you for many years.
Consider this scenario of excess credit card debt. Let's say you're 25 and you ran up $10,000 in credit card debt at 17% interest. Assuming a minimum payment of $150 per month, it will take you almost 17 years to pay off the balance (202 months), and that's assuming you never charge another dime.
So, you'll end up paying $30,300, or more than triple the amount of your debt. And, this isn't even the worst part. If instead of using that $150 per month to pay down debt over a nearly 17-year period, you invested it for your retirement, it could be worth more than $400,000 by the time you're ready to retire at 65. What would you rather have? $10,000 worth of "stuff" now, or 40 times that amount in your retirement fund?
The same goes for other types of unnecessary debt as well. Maybe you don't need a $40,000 new car just because you can qualify for it. Or, maybe you don't need a $5,000 state-of-the-art TV when a $1,000 LCD will do just fine.
I'm not saying you should never treat yourself, but consider the true cost of debt. Getting into too much of it early in life can lead to serious regret down the road.
Dan Caplinger: One of the things many young adults don't appreciate is that they're often in the lowest tax bracket they'll ever see for the rest of their lives. Because of the small tax burdens many struggling young adults have, saving for retirement can be tough, but the benefits of opening a Roth IRA are much greater than for those who pay higher tax rates.
Many taxpayers opt for traditional IRAs rather than Roths because they can get an up-front tax deduction for traditional IRA contributions. However, the tax deduction is only worth whatever the taxes are that you'd owe on the contributed amount, so if you're in a very low or zero tax bracket, then a deductible IRA does you no good. By contrast, a Roth IRA never gives you an up-front deduction, but it does leave all future income and gains tax-free -- even after you start making withdrawals from the account.
By maxing out your Roth IRA opportunities in your 20s, you can start building a solid base of tax-free funds for retirement. Moreover, because of the flexible withdrawal rules for Roth IRAs, you can often use Roth IRA money as a source of emergency funds without facing the same penalties and tax ramifications that a traditional IRA has. With a maximum contribution of $5,500, most people in their 20s will have trouble contributing the full amount, but even smaller contributions will make a big difference down the road in retirement.
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