In your 20s: Get started
Oh, the temptations of life with a full-time paycheck for the first time ever. So many cool things to do! So much cool stuff to buy! Not so fast, money experts say. Your financial priorities right now should be to set up a budget (here’s how to do that) and establish other good money management habits, build a solid credit history, and begin to save. “How much should I save for retirement?” may seem like a weird question in your twenties, but the power of compound interest is on your side, so every dollar saved will grow and grow. Pay yourself first: Use direct deposit to save 10 percent right off the top of every paycheck.
If your employer has a 401(k) retirement plan, sign up, especially if the company offers a match. You’re essentially turning down part of your paycheck if you don’t take advantage of this. This retirement calculator on Bankrate.com shows that putting 5 percent of your pretax salary into a 401(k) with a 50 percent match, starting at age 24, will turn into $985,348 by retirement time. That’s $2,000 a year on a $40,000 income, about $5.50 a day. Skip your daily caramel macchiato and retire a millionaire!
Other financial priorities for new grads: Build an emergency fund of at least three months’ salary, so unexpected expenses don’t put you on the treadmill of credit-card debt. Then turn your savings toward a short-term goal, like a wedding or down payment on a home. If you get a windfall—a bonus or tax refund—use this rule of thirds: a third into savings, a third to pay down your student loan debt, and the final third to spend on something great.
Milestones: Start saving 10 percent of each paycheck and aim to have the equivalent of your annual salary saved in a retirement account by age 30.
In your 30s: Juggling life’s milestones
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As millennials reach their 30s, expensive life events like marriage, kids, and home ownership put a strain on the budget. The average American wedding in 2016 cost more than $35,000, according to TheKnot.com—and that’s not including the honeymoon.
These big-ticket milestones mean that even as your earning potential grows, you may find it harder to figure out how to save for retirement or avoid running up credit-card debt. (Take a look at 13 things your credit-card company knows about you.) Focus on paying off your student loans by age 30 to free those dollars for other things. As your salary increases, live below your means, and stash your raises away. (Memorize these 11 money rules by age 40 to keep expenses aligned with income.)
Now is a good time to open a Roth IRA, especially if your employer doesn’t offer a retirement plan. Where traditional IRA accounts grow tax-deferred, a Roth IRA uses after-tax dollars, but allows the saver to withdraw without penalty, up to the amount they’ve contributed.
Your home is the largest investment you’ll make, and a mortgage is a 30-year obligation. (Here are five costly mistakes to avoid when buying a home.) Children are another expensive investment; the U.S. Department of Agriculture estimates that a child born in 2015 to a middle-income family will cost $233,610 to raise, about $13,000 a year, not counting college expenses. According to SavingForCollege.com’s college cost calculator, that 2015 baby will cost $199,000 to educate. Opening a 529 college savings plan when they’re babies puts that compounding interest rule to work for them in the next 18 years.
Milestones: By 35, have twice your salary saved for retirement, and make the final payments on those student loans. Buy term life insurance and start college savings accounts for your kids.