For 20 Somethings:
Advice on Retirement Planning

Consider this 20 something advice if you're under 30 and just getting started with managing your finances.

You've probably already heard that the earlier you begin saving for the future, the better off you'll be. Well, guess what! It's absolutely true!

You can start at a young age investing just a very small amount and the head-start and extra time will magnify your money. This happens through dollar cost averaging and long-term earnings.

Pay attention to these 3 rules and you'll have the freedom to do whatever you want, whenever you want.

Live within your means to avoid debt.

Save something out of every paycheck.

And never ever take money out of your retirement savings before you retire, except for this one time I'll tell you about below.

20 Something Advice:
Live Within Your Means to Avoid Debt

It's really easy to get a credit card these days, and that makes it tempting to buy more than you can afford. That's what living beyond your means is all about.

To live within your means, you need to follow a budget and avoid using credit to buy things you can't pay off with your next paycheck.

Believe me, there's nothing more depressing than finding yourself buried in debt that you can't see an end to, and it is so easy to do.

Wants vs Needs

The reason so many people get into this trap is that we all want to have a nicely furnished home, a cool car, and great clothes. We also think we need an extravagant vacation after we've worked a while.

Notice I said "we want". What we need is to slow down and realize that all of those things have be earned through hard work and "paying our dues." We need to learn to pace ourselves, set goals, and live true to ourselves, not according to how we want to appear to others.

Learn to say that you can't afford that right now, or that it's not a priority at the moment.

When you can do this, you'll find a sense of pride in the fact that you are making your way yourself, responsibly and without the false support of credit. Having no debt feels so good!

Accept hand-me-downs from your family, buy used furniture, drive your car for more than 6 years before you trade for another one, and don't buy it brand-new.

Save Something from Every Paycheck

More 20 Something Advice

If you're 20 something and just getting started, you may think you can't possibly save any money. You may think you don't make enough money to even have a budget.

Not true. If you sit down and plan a budget, and put "savings account" first, you'll find a place to get it. Even if it's just 5 dollars to start with.

If your employer offers direct deposit, they may allow automatic deposits to more than one account, one for checking and one for savings.

Another way to save is to drop your daily change into a jar and periodically put that into a savings account.

Save some of your money out of every paycheck or gift, no matter how small. If you don't have a 401k savings plan available to you, start with a regular savings account.

Ideally you should have the savings automatically deposited in your 401k or savings account so you aren't tempted to spend it.

If you are starting with a savings account, when you have enough in regular savings, open an IRA investment account so that your money can really grow over the years. It won't grow very quickly in a regular savings account because interest rates are so low these days.

As soon as you have the IRA, change your automatic deposit to put money into regular savings and an IRA. Once you have enough in savings to cover six months of expenses, switch all of it to the IRA.

The earlier you start saving, even the tiniest amount, the sooner you will be able to stop working and have the option of free time to explore your interests, travel, or just have time to enjoy your friends and family.

We all want to have a nice home, comfortably furnished, and a nice car. But it can be done without debt. Just pace yourself and go after these things SLOWLY!

Never Ever Take Money From Retirement Accounts - Except Maybe This One Time

The most important rule about 401k and IRA accounts is to never ever take withdrawals from them before you are ready to retire.

First there will be penalties to pay - not good! Then, it will be very hard to recover from this hit back to where you were.

Make up your mind that your invested money cannot be touched, for any reason.

There is one time when it is ok to take some money from your account, and that is when you are ready to buy your first home. Under the hardship rules for 401k accounts you are allowed to take a down payment from your tax-advantaged savings if that is the only way you can make it happen.

So if you've done a good job of saving early and have gotten to the point of being able to afford a house payment and maintenance on a home, you can use some of your investment savings to buy it.

The reason this is ok is that a home with no mortgage is a very good asset to have in a portfolio. Everyone needs a place to live, and having one that's free and clear when you retire puts you significantly ahead.

So when transferring funds from a retirement account to a home, you are still investing in your future financial freedom.

Be the smartest 20 something person you know!

The keys to a happy life after your 20's are:

  • Avoid debt and live with integrity
  • Save something for your future self
  • Use your money wisely

Next: How to Save for your future


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