Taking Stock of Your Finances in Your 20s
May 4th, 2011
Yesterday I went to a luncheon on women and finance focusing on the need for women to take a more active role in their investment planning. So many 40-something women wish they had started planning for their retirement in their 20s. But it’s striking how many women don’t. At the luncheon they presented a stat that only 15% of women who are married do any retirement planning. Yet 47% of women over 50 are single and financially responsible for themselves. Scary! Just another reason to get started. It’s never too late but consider the following:
Someone who puts $4,000 a year into retirement accounts starting at 22 can have $1 million by age 62, assuming 8% average annual returns. Wait 10 years to start contributing, and you’d have to put in more than twice as much — $8,800 a year — to reach the same goal.
I think we all know we should do it but we don’t know how. What is the first step? Just talking about it, which was the point of the luncheon. Women tend to not talk about money as much as men and don’t feel comfortable doing so. Yet once they start talking and doing, they typically get better results than men. I’ll share some 40-something advice from the presentation yesterday below, but I have also listed a bunch of helpful 20-something resources at the end of this blog post to get you started.
One of the women speaking has a 21 year old daughter and I asked her what advice she gives her. Her reply, invest in your 401K if your employer offers one. If not a Roth IRA. Sounds obvious, but her biggest concern is that many women in their 20s don’t, and if they do, they don’t take enough risk in their allocation. The biggest impact you can make is your asset allocation — how you distribute your 401K or investment between riskier stocks and more stable bonds. You need to determine what’s right for you but a general rule of thumb is that the more time you have, the more risk you can take. Jean Chatsky offers this tip but take advantage to the tools and resources offered online and by financial advisors:
Understand asset allocation.A good rule of thumb is to subtract your age from 100. The answer is the percentage of your portfolio you should have in equities: If you’re 40, that’s 60%. “I don’t know what the magic number is, but I do know it isn’t zero,” says Odean. “And so I think a lot of women would benefit from being a bit more aggressive in their overall portfolio, in terms of asset allocation, but not in terms of trading.” (See full article from DailyFinance:http://srph.it/hcnv6f)
The financial advisor’s other advice to her daughter and women of all ages: If you get married set up the expectations that you will be involved in financial planning right from the start. If someone gives you a “stock tip” it’s probably too late. Read the business section of the newspaper instead — it’s probably more interesting than you think. Take a long term view — most people’s investments perform at less than inflation because they make emotional decisions and change too often.
We all know how hard it is when the economy is tough, your disposable income is low, credit cards are available and there are so many things you could spend your money on. There is this tendency to feel like you are an adult so you need adult things. Maybe you see friends buying furniture or expensive handbags and you feel like you should too. When you get your paycheck the pressure is high to go out and splurge a little …a nicer meal than usual, a new dress, the new ipad or whatever! So many 40-something women attest to the fact that none of those things are their favorite memories from their 20s. It’s the experiences. This touches on the key tension — 40:20 hindsight says travel as much as you can, spend on experiences not things. But how do you do this if you are supposed to be saving?
In fact on my way to the seminar I got a question on just htis from a 20-something about just this:
Q: How do you balance a desire for travel with a desire to invest and save? 20-something
The 40-something investment planner who invited me to the luncheon offered up this advice:
“Ideally, an individual (in their 20s) should allocate 50% of their after-tax income to cover their necessary ‘must’ spending – which includes shelter, food, insurance, transportation, utilities. Add to that, somewhere between 10-20% of their pay for retirement/saving plan/loan repayments. That leaves 30% of their income for such ‘wants’ as vacations and entertainment. They will probably need to be frugal and resourceful in each category – given that their income may be limited – but if they break it down into these buckets, they should happily – and without guilt – be able to travel as they also save money in their second decade of life.”
Plus when you’re young you can travel cheaply…it’s part of the experience!
Now, here are some helpful resources:
Getting started on financial planning in your 20s:
10 Commandments for 20-something money management on MSN:
Interesting tips on what you can learn from men vs. women on investing:
Jean Chatsky on talking to other women about it – start your own invesement salon!
Financial Advisors Give 20-somethings their best tips:
20-something tips on asset allocation:
20-something tips for going the financial advisor route:
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