by Sarah Heller

Created on: September 22, 2009   Last Updated: September 24, 2009

People in their 20's are just starting their lives, but by the time they are 30 they should ideally carry no high-interest debt, have established an emergency fund, and started a retirement fund. Upon hearing this, many 20-somethings are surprised, especially those that have obtained higher degrees. All three of these goals can be achieved by someone who has only been in the workforce for a year, however.

The first important when starting to invest is to get rid of any loans that cost more in interest than you can stand to make with an investment. Since an aggressive to moderate stock portfolio has historically returned between 9 and 11 percent per year for the last thirty years, that means getting rid of any debt with an interest rate higher than 10%. For most people, this will include credit card debt and for some people, their car loan and/or student loans.

After establishing a small emergency fund (see below) devote any extra money towards paying off this debt, starting with the debt at the highest interest rate. If you have no extra money, make the minimum payments on all of your debt, avoid taking out any new loans, and use any extra money (tax returns, work bonus, gifts, etc.) towards the highest interest loan. As you eliminate any loan, put that money towards the next highest interest rate loan. Once you have eliminated any debt with an interest rate above 10%, make the minimum payments on your other debt and start aggressively saving towards an emergency fund.

A person in their 20s should be able to handle a small emergency or temporary job loss on their own with money from their emergency fund. Read this article for a detailed method of saving one. In general, try to save up at least three months of living expenses for yourself, plus one additional month for each person who is dependent on you. A single 24 year-old would need three months of living expenses saved, while a married 27 year old with two children and a stay at home spouse would need at least six months. Keep at least one month of the money in an FDIC insured savings or money market fund, with the balance in a 30 day CD. This ensures that you will have access to money when you need it.

Finally, start a retirement fund. Young people today do not have access to the pension plans that their parents and grandparents did, and Social Security is no longer guaranteed either. This means that the only person who is looking out for your retirement is you. Although many advisers recommend starting

• 1
• 2
• Next Page >>