Personal Finance in Your 20s and 30s

In your 20s and 30s, you're just starting out, establishing yourself in your career or perhaps beginning a family. You may have student loans, as well as credit card and other debt from college. It may be a struggle to make your paycheck cover all the expenses associated with renting or buying a decent home and furnishing it, building a professional wardrobe, driving a reliable car, and having a social life. Retirement seems light years away. Do not be fooled. Now is the time to start planning for the rest of your life.

Your greatest asset in your 20s and 30s is not money, it's time. The decisions you make and the actions you take (or fail to take) now will have an intense effect on your future. Each dollar you save in your 20s can be worth ten times as much as a dollar saved in your 40s, so your 20s and 30s are prime time when it comes to saving for retirement. If you don't start now, you'll never be able to catch up without putting away much more money later, when you'll have other demands like raising a family and funding your kids' college educations.

Here's what you should do now to ensure that you can have the lifestyle and retirement you dream of.

1. PAY OFF YOUR CREDIT CARD DEBT

Compounding interest on credit card debt is your number one enemy. Make paying off your credit card debt a top priority. If you have savings, use them to pay off the debt with the highest interest rates. It doesn't make sense to pay interest of 13 to 20% or more on your debt while your savings are earning a measly 1 or 2%. Use savings that are earning low interest rates to pay off your 10 to 20% credit card debt, and you'll immediately earn a guaranteed tax-free return of 9 to 19%.

If you don't have enough savings to pay off your credit card debt, pay more than the minimum each month. If you pay the minimum on a $2,000 or higher credit card balance, it will take you more than 30 years to pay it off because the minimum payment is barely enough to cover your interest expenses. Any additional amount you pay will go directly towards your principal.

If you can't pay off your credit card balances immediately, get a credit card with a lower interest rate. If your credit isn't good, keep trying for a better rate until you find one.

Don't Worry Too Much About Student Loans

Student loan debt usually has lower interest rates than credit card debt, so don't worry about paying off your student loans early. By having low payments on this low-rate debt, you'll have more money to apply to your high interest rate credit card debt and you'll come out ahead in the long run.

Know When To Get Help

If you can't make substantial progress on paying down your credit card debt, seek help. Your creditors may be willing to work out a payment plan or reduce your interest rate. If you can't negotiate an agreement yourself, seek credit counseling from a reputable member of the Consumer Credit Counseling Service.

2. SIGN UP FOR YOUR EMPLOYER'S 401(k) PLAN

Don't waste the magical compounding years of your 20s and 30s. If your employer offers a 401(k) plan, run, do not walk, to your Human Resources Department and sign up today. Even small amounts of money you invest in your 20s and 30s has plenty of time to grow into significant amounts if invested early, regularly, and not too conservatively. If your employer offers a 401(k) match, ask your Human Resources representative to help you calculate how much you should contribute in order to take full advantage of it. You don't want to leave any free money on the table.

If your employer doesn't offer a 401(k) plan, set up an IRA at a brokerage firm, mutual fund company, bank, or other financial institution and contribute the maximum every year.

Even if you faithfully contribute to your 401(k) plan, you can sabotage your wealth-building efforts if you invest too heavily in conservative funds. When you start in your 20s and 30s, you can afford to assume some risk by investing in stocks and bonds. Allocate your investments between several types of funds and sectors of the economy.

One of the worst things you can do for your future is to cash out your 401(k) when you change jobs. Not only will you pay taxes on the balance and a 10% tax penalty, you'll have squandered your future and erased all the benefits of saving in your 20s and 30s. If you change jobs, you may be able to leave your money in your employer's 401(k) plan. If not, or if you'd prefer not to, roll it over directly into a new employer's plan or into a special IRA.

3. BUILD AN EMERGENCY FUND

Once you've paid off your credit card debt, concentrate your efforts on building an emergency fund equal to a minimum of three to six months worth of living expenses: rent, utilities, car payments, food, transportation, insurance, etc. Put this money in a separate bank account that is easily accessible and use it only in an emergency such as job loss or uncovered medical expenses. Don't touch it for anything else.