For Young Investors, Too Many Choices, Too Few Dollars

By Lisa Smith AAA

Moving out of mom and dad's house provides a great deal of freedom, but that freedom also comes with responsibilities, such as rent, a car payment, school loans and credit card bills. You probably also have aspirations for a better car, a nice vacation and a home of your own. Of course, your social life isn't free and many of the things that your grandparents never heard of - from Starbucks and cable television to cell phones and iPods - and are luxuries that many young people can't live without. Unfortunately, everything costs money - and with so many places to spend it, it can sometimes be hard to have enough of it by the end of the month. If you're new to the workforce, the distant future may seem too remote to even rate as a priority - especially when you're just learning to balance your finances. In this article, we'll go over how to begin working with the limited resources you have now in order to prepare for the future - you'll be glad you did.

Retirement Seems So Far Away
You probably keep hearing about how Social Security won't be there when you need it, but with retirement such a long way off, it's hard to be worried. Retirement?! When you are in your 20s, retirement seems like a distant event - and it is! You've been on the planet for only two decades, and you've got probably twice that amount of time standing between you and your last day at work. So why think about retirement now, especially when there are so many other things competing for your cash?

The answer is simple. Despite the time and distance involved, the future is something that will be here before you know it. Someday, either because you're tired of working or because your health isn't what it used to be, the idea of schlepping off to work will no longer have the same appeal that it does today. When that day comes, you need to be ready for it. (To read more, see Savings Plans For Minors and Why is retirement easier to afford if you start early?)

How to Prepare
When it comes to preparing for your future, the most important step is to get started. The first thing that you need to do is make a commitment to saving money. While the long time horizon and huge amount of cash required to support yourself if you stop working can seem overwhelming, the way to tackle the task is to start small. Choose an amount of money that you can relate to - and that you can afford - and set that amount aside each week.

Even an amount as small as $25 a week adds up to $1,300 over the course of a year. That $1,300 per year becomes $52,000 over the course of 40 years. Of course, if you invest the money, and every investment that you make doubles every eight years, that first $1,300 becomes $2,600 in eight years, which becomes $5,200 after 16 years, $10,400 after 24 years, $20,800 after 32 years and $41,600 after 40 years.

While the sums are small and the math is simple, the example provides a pretty good idea of what a realistic savings plan can do for your future. To really put the power of time to work for your portfolio, find out if your employer offers an employer-sponsored savings plan. If so, and the company offers to match your contributions, you won't want to pass up that opportunity. Not only will the money that you contribute grow, but so will the money that the company adds to the pot. (To read more, check out Delay In Savings Raises Payments Later On and Determining Your Post-Work Income.)

When you get a raise, increase the amount that you contribute. When you change jobs, take the money with you and deposit it in your new employer's plan or roll it over to an individual retirement account (IRA). The import thing is to keep your money growing throughout the course of your career. Always add to the total and never do anything to chip away intentionally at your savings.

More Than Just Retirement - It's a Lifestyle
Retirement isn't the only financial goal that you will have. Raising a family, the need to replace your car multiple times, and simply keeping yourself fed and clothed over the course of a lifetime are also expensive propositions. To meet these challenges, you'll want to keep your wallet fat and your expenses thin. Making this happen requires a serious commitment to a thrifty lifestyle. You need to manage your money and not let your money manage you. (For more on how to do this, read The Beauty Of Budgeting and The Indiana Jones Guide To Getting Ahead.)

Start by eliminating your bills. Make extra payments any time that you can, even if it's only a few dollars. Pay off the highest interest items first (credit cards before school loans, school loan before 0%-interest car payment) and, while you're working to pay down and pay off your bills, don't make new bills. It's important to avoid recurring debt, like music services, unnecessary telephone services, computer gaming fees, magazine subscriptions, credit cards and everything else that comes with a monthly bill attached.

Even when you spend cash, be sure to buy stuff that you can afford. Maybe that Jaguar will have to wait until the Neon is paid for. Or that week in Cabo could be skipped in favor of a weekend in the mountains. Regardless of where and how you spend your hard-earned dollars, just make sure you don't spend all that you earn.

To keep yourself on a sustainable track, figure out how much you earn and how much you need to pay your bills. Make sure your bills come to less than what you earn, and make it a habit to live on less than you earn. From there, make sure that the first bill you pay each month is your 401(k) plan or other form of long-term savings, like an IRA.

The Keys to Success
The keys to success are simple. First, you need to accept that everyone is on a budget. Even the very richest people have a spending limit. Second, budget something for yourself, and spend every cent of it! If you don't have a little fun, you'll never stick to you plan. Third, think long term. The number of people that work a lifetime in order to retire far surpasses the number that got rich quick. Retirement may seem like it's a long way off, but if you look at that span of years as an advantage, rather than an excuse, you'll have the resources you need to retire comfortably.

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