Your Money, Your Life: Individuals in their 20s and 30s should reduce debt,

Your Money, Your Life: Individuals in their 20s and 30s should reduce debt,

1 February, 2007

This four-part series will examine where people should be focusing their financial efforts
based on their current life stage. Future articles will address individuals in their 40s, 50s
and 60s and beyond.

You’ve graduated from school and landed your first job. Or perhaps, graduation was further back than you want to admit. Whether you are a new grad or pushing the big 4 - 0, do you know what you should be doing with your paychecks?

While vacations, a new car and electronic gadgets are enticing, it’s never too early to plan for your future.

“People in their 20s or 30s should focus on putting as much as possible into their 401(k) plan,” said Trista Acker, CPA, CFP, manager, Dublin office. “The more money they invest at an early age, the more time it has to compound.”

“With all the talk about Social Security being in jeopardy when this age group is ready to retire, personal retirement savings is very important,” said Wendy Shick, CPA, CFP, principal, Mentor office. “If your company provides a 401(k) match, you should maximize that benefit.”

Equally important, though, is establishing a budget to ensure you live within your means. Until recently, your parents may have paid for most of the monthly expenses for which you are now responsible – shelter, heat, electricity, food and insurance, to name a few. A budget will help you realize what you must allocate to pay for needs and how much you truly have to spend on wants.

“When you get a raise, it’s easy to spend the extra money and enhance your current lifestyle,” Shick said. “However, when your job is solidified, you should really start a savings program – perhaps for a home purchase, which is usually the best investment you can make.”

In addition to saving for a house, you should establish a rainy day fund. Shick advises that you have between two and three months worth of income in savings for emergencies and unplanned expenses that may develop.

Many younger people, especially those in college, find it easy to obtain and use credit cards. After all, they can make purchases and don’t have to worry about paying for the items until the bill comes due. However, that’s how most people get into financial hardship. Anyone who managed to run up credit card debt should strive to reduce the debt as much a possible.

“Credit cards come with high interest rates. If you don’t pay off this debt quickly, you are basically throwing away your money,” Acker added.

Investing is also an option for those in their 20s and 30s, but it should not be the top priority for those with debt. For those who need to keep their assets liquid, savings accounts and money markets are good ways to grow money. If liquidity is not a necessity, then a long-term savings approach, including the purchase of stock and mutual funds, would be a better option.

“One thing to remember when deciding whether or not to invest or pay off debt,” Acker advised, “if the interest rate on the debt is higher than what would be earned by the investments, pay off the debt first.”

While you may be tempted to splurge on extravagant items, it’s more important to focus on the long-term. By developing and following a personal financial plan when you are young, you will one day be able to afford life’s luxuries.