Most twenty-somethings don’t know much about their finances, and what you don’t know could be robbing you of your financial future.
“If you can avoid making financial mistakes in your 20’s you will be significantly better off in your 30’s and 40’s. It’s about being responsible, so as not to be financially burdened later in life,” says Alexa von Tobel, founder and CEO of LearnVest, which provides content, tools, and support to help you gain control of your personal finances.
Every twenty-something should have a financial game plan, says von Tobel, and should try to reach these five important milestones:
1) Pay Off Credit Card Debt
2) Start Saving for Retirement
The sooner, the better! “Let’s say you start working at 25, you plan to retire at 65. Let’s say you live to 95..that means 40 years of working to pay for 70 years of life. If you’re not really contributing and particularly contributing early, you are never going to be prepared for retirement,” says von Tobel.
If you don’t have access to a 401k--and maybe even “free” matching funds from your employer--open up an IRA and start enjoying the “magic” of compound interest.
How’s this for an incentive? Let’s say two people put aside $24,000 into their retirement savings over the years. One starts saving smaller amounts at age 25; the other plays catch up with larger deposits starting at 45. By the time they both reach 65, the person who started 20 years earlier comes out almost $40,000 richer than the late starter!
To take compound interest even further, set higher goals. Want to retire at age 65 with a million dollars? Von Tobel says if you're 25 you only need to put away $5,009 per year -- or $417 a month -- to make that goal happen. If, over time, the market returns, on average, 7% a year you'd only need to save up $200,360 total with the power of compound interest bringing you to your million dollar goal over the years.
3) Establish An Emergency Fund
The job market is too volatile to go without a safety net, especially given the average length of unemployment – now 34 weeks! Have funds automatically deposited into a savings account (You won’t miss money you don’t see!), and try to have 6-9 months worth of living expenses set aside in a basic money market account.
4) Get Health Insurance
About a quarter of young adults take a financial gamble and go without! Yes, heath insurance is expensive, but one accident - or illness - could be devastating. If you’re under age 26, ask your parents to add you to their plan as that’s generally the best deal!
5) Have a Sense of Career
You may not know what you want to do for the rest of your life, but make sure to put your college degree to work!
No doubt, you millenials are up against unique financial challenges--a tough job market, rising personal debt, and greater responsibility for your financial future, but you also have more resources available than previous generations did.
In addition to services like LearnVest, which empowers you to take control of your personal finances, there are free apps like mint and simple, which help you budget and track your spending. I’d start there.
For Yahoo! Finance, I’m Vera Gibbons.