This morning’s guest post is advice all of us 20-somethings could use as a slap in the face: how to manage our finances. Since we’re at the age where our salaries aren’t growing as fast as our wildest dreams, it’s important that we learn how to save and plan for our future. Read on!
If I were to ask you what the primary financial concerns for a twenty something are, what would your response be? Student loans? Housing? Wedding and honeymoon? Those, amongst many others, are all very valid items to have on the list. One financial obligation that isn’t quick to fall off the tongue of most, however, is that of retirement. Twenty somethings are far away from retirement age, so the concern doesn’t seem as immediate as other obligations. With a little planning, the investments made towards retirement in your twenties can pay enormous dividends in the future.
Before I continue on, allow me to address a few items. I’m not a financial professional, nor will I tell you that you absolutely need to be investing in Stock X over Stock Y. My intent is merely to share what’s working for me, as well as what’s not. Furthermore, there’s some really bad financial advice out there, particular geared at twenty somethings. My goal is to help you find some direction through the haze.
Let’s start simple. Regardless of your income, living within your means is a vital key to any sort of retirement planning for a twenty something. The end goal is the have more money coming in than you’re spending, however when you’re trying to plan for retirement, it’s helpful to have a guide to base your spending on. I’ve found the following formula to be beneficial to me.
- 50%-60% of your income should to your recurring costs (bills, rent, utilities, groceries, etc)
- 30% of your income should be split between savings and retirement money (more on this later)
- 10%-20% of your income is yours for what you want (this includes movies, new clothes, etc)
An important thing to take into consideration is that the above ratios reference your take home pay, not your pretax pay. If you try to budget based off of your pretax pay, you’re going to get yourself into a world of hurt. Likewise, since many employers offer the option to contribute money to a 401k pre-taxes, you should adjust your post-tax percentages accordingly to any 401k contributions you make.
Speaking of 401k, if your job offers 401k matching, you’re hurting your long-term finances if you don’t take advantage of it. While many employers have scrapped 401k matching all together, those who do have it are essentially paying you to invest in their retirement plan. Utilize this to its fullest potential.
Since many twenty somethings are also on the lower end of the pay scale spectrum, another potential investing option is the Roth IRA. Unlike a traditional IRA, which is not taxed until you receive distributions from the account, a Roth IRA is taxed whenever you contribute to the fund. That said, when you are of retirement age and go to get money from the Roth IRA, you don’t need to worry about being taxed at that time. Note that both Roth and traditional IRAs do have a contribution limit of $5,500 combined for the tax year 2013, which is much lower than the 401k limit of $17,500 for the tax year of 2013.
Finally, what if you’re looking for a way to plan for retirement, but don’t want to have your money tied up for years on end like an IRA or 401k would do? Many banks offer Certificates of Deposit (CDs) with varying interest rates. These CDs are typically six months to three years in length, and do provide growth as they mature. Of course, there’s always the option for a more traditional savings account, though with either CDs or savings accounts, expect a much lower rate of return than a 401k or IRA.
Absent Elemental is the pen name for the author of the blog Short Stories and Sustenance. His work primarily focuses on dark fiction, the road to becoming a successful twenty-something, and his love for rocky road ice cream. You can find him on Twitter @blkholesun.