Finance Getting Your Finances in Order in Your 20's

Getting Your Finances in Order in Your 20s: Planning for Retirement

You may be thinking “I’m in my twenties, I don’t need to worry about retirement yet”. You may think that retirement is more of a thing you do in your thirties, but actually getting started as early as possible can have a huge payout later on.

Did you know that to retire, someone our age needs to have more than $1 million saved up? It’s ok. You can panic for 30 seconds.

Ok panic is over. Now I’m going to help you get there.

Why You Should Start Early

The first and most important, yet intimating part is you must start saving. Even if you are only setting money aside for now that’s a start. Yay! That was pretty easy. But that is only a temporary solution. You want to get your money into an investment ASAP.

Even beginning investing 1 year earlier can change the final payout by a surprising amount. It’s hard to imagine yourself, but luckily I have a cool little tool that can show you the difference investing early can make. Check it out here to help gain the motivation to start. I received this tool from Robert Moritz, a certified financial planner, and I’m sharing it with you with his permission. He actually helped me set up my Roth IRA so I would definitely recommend looking him up if you’re in one of the states he services (IN, OH, AL, CA, FL, GA, IO, KY, PA, SC, WV).

Look at the difference investing at 20 vs. 21 makes.

According to this simulation, investing $1,000 every year starting at age 20, this person had $1,056,189 in accumulated value by only 48.

See what happens when they wait just 1 year.

On the other hand though, when they waited to start investing until 21, they only had $959,172 in accumulated value by 48. That is almost $100,000 in lost savings.

Now you see why it’s so important to start investing as soon as you can and as much as you can.

Feel free to play with your own numbers and ages.

Types of Retirement Funds

Two common choices for investing include 401 K and IRAs.

A 401k is usually done through your place of employment as a benefit of working for them. Companies will often offer a “401k match”. Which simply means that whatever you contribute to your 401k retirement fund, the company will also put in a certain amount. You should make it a priority to meet the maximum amount the company will match because that’s just free money. However, don’t limit yourself just to the maximum match amount. If you can, always put in as much as your budget allows.

The simplest way to describe an IRA is it’s a retirement fund for people who don’t have a 401k offered through their work. This will often happen if you work for a small organization, you’re a freelancer, or if you only work part-time. A certified financial planner can help you decide if a regular IRA or a Roth IRA is better. Basically the difference is when the government taxes the money. For myself, I went with a Roth IRA based on my advisors advice. However when I changed jobs, my advisor thought moving my 401k from the old job into a traditional IRA would be most beneficial.

Each of these accounts has a legal maximum you are allowed to contribute each year. This is just another reason you should begin investing early. You won’t be able to make up for it later as easily due to the yearly contribution limits. As of 2021 tax year, the IRA contribution limit is $6,000 for a single person ($12,000 for a couple).

Something very important to remember about retirement funds: you can not take any money out of this account after you put it in until you qualify for retirement. If you take it out early, you will incur some major penalties that will make it not even worth taking the money out. So while you should always put in as much as you can, don’t put in any money that you will need back before you’re 60. This is not the place to save for a car or a house. Keep a savings account you can access for those and for emergency funds.

Remember, a little is better than nothing. Nothing with compounded interest is still nothing. Speak to your financial advisor to find a plan that works for you and your goals.

These are more like guidelines anyway.

*I am not a financial expert nor should this advice be considered legal advice. You should always listen to a certified financial planner before me.

Getting Your Finances in Order in Your 20's

Getting Your Finances in Order in Your 20’s: Student Loan Repayment

Thinking about finances when your starting out can seem scary. Sometimes you feel like just pretending these expenses aren’t there, but it is actually not so bad when you take it step by step.

First things first, chances are you have some student debt if you went to university. I know my student debt felt really overwhelming, but it made me feel so much better to sit down and make a plan.

Creating a Debt Repayment Plan

1. Know How Much You Owe Each Month – when you’re entering the world of repayment, you should first consider your required repayment number. This number is non-negotiable and you must pay it off every month. Otherwise you will default on your loans and that is just not good, don’t do that. Sometimes it’s possible to apply for Income based repayment. This is a way to ask your Loan Servicer to take your income level as a consideration to make your required payment amount lower.

2. Decide How Much You Can Afford – once you know how much you have to pay, figure out how much you can pay. You are going to want to pay back as much as you can each month. It’s going to be incredibly tempting to just pay the minimum so you can spend more money on a nicer apartment or eating out, but don’t. Paying off your loans as early as possible will let you have these things and more in the future, and most importantly, save you a ton of money. Think of it this way: every dollar more you pay, is one less dollar that is going to increase your interest owed.

3. Choose a Repayment Plan – when choosing a repayment plan, it’s important to know what’s most important to you. There are 2 routes you could take for repayment: The Snowball Plan or The Avalanche Plan. Remember you will still have to make any minimum payments on all accounts no matter which plan you choose. You take the amount you decided you could pay each month on loans and pay off the minimum requirement on each loan, and then all remaining goes toward one account that you focus on. The Snowball Plan: You focus on the loan with the lowest balance. This method is good if you need to keep your motivation up by getting the satisfaction of paying an account off. The downside to this plan is you will end up paying more in interest. The Avalanche Plan: You focus on the loan with the highest interest rate. This method is the one that will result in you paying off the least amount of interest overall. The downside to this one is you won’t see accounts hitting zero as fast. I chose Avalanche for my repayment plan because I cared more about saving money than seeing the little accounts hit zero. I still get that enjoyment from seeing my most daunting account get lower each month. I actually have a really helpful Excel sheet that can help you see the difference in each of these plans. (Download below) You enter each of your loans, their interest rates, and then you can select which plan you want to view, and it will show you the amount of interest you’d pay and when you’d have each loan payed off. I found this little tool to be the most comforting when I was first looking at my loan situation. I got this form from Financial Advisor, Robert Moritz in Indianapolis. I’m sharing it with you with his permission. If your looking for someone to help you with investments, retirement planning, or other financial advice; look him up and schedule an appointment. Here’s his website. Don’t feel shy about telling him I sent you.

4. Set Your Loans on Autopayment – Once you know how much you’ll be paying each month, and where you want that money to go; set your loans on autopayment. Some repayment servicers will give you a little rate reduction for setting your loans on autopayment. It will also help make sure you don’t miss a payment. Don’t just set it and forget about it though. You should keep an eye on it to make sure nothing has changed, make sure you have enough money in the account it’s pulling from, and it gives you the chance to see your balance going down and get that little sense of accomplishment.

Most importantly do what works for you, these are more like guidelines anyway.

*Disclaimer: I am NOT a financial expert nor should this be received as professional advice. Always take the advice of a professional over mine.

This is part of my Getting Your Finances in Order in Your 20’s series.