Thursday, September 29, 2011, AM | 2 Comments
George Bernard Shaw’s famous quote “Youth is wasted on the young” can be proven wrong by the young if they are smart to take action today in the right direction so far as their financial decisions go. The quote is not always true for many young individuals and families. They are smart and they can act determinedly and decisively for their financial well-being.
There are three things that are in favor of the young:
- The young can make financial plans earlier
- Savings have more time to work for the young
- The young can take investment risks
The young can make financial plans earlier
The young must plan earlier – in their 20s. Many folks got out of college with the debt-burden under their belt in terms of student loans and other expenses. In order to start saving and thereby investing, they must first lessen this burden by paying off high-interest credit cards or high-interest rate loans on student debt.
You must look at the balance. If you are earning less on your savings [and it’s very true these days] than the interest on the loan, then you must first try to pay off all your debt. It makes no sense to try to save if your debts are growing faster than your money might.
However, having said that, you must take advantage of the potential tax benefits and any company match available in a retirement account such as 401(k), even if you have debts to repay.
When you are making plans for your financial future, there are many roads you can take for your financial success. A few important ones (and absolute necessary) are given below:
You must plan for your retirement whether you are still paying your debt or not. You will be happy later on when you get closer to retirement. That time will come before you know it.
If your employer offers a retirement savings plan like 401(k) – offered by private companies, 403(b) – offered by public education organizations, or 457 – offered by governmental and certain non-governmental employers, take advantage of it.
If your employer offers a matching contribution, it is like getting “free” money. Also, you get the added potential benefits of any tax-deferred growth and compounded returns.
Some experts suggest there might be one exception though: “If your employer’s matching contribution is low (less than 50%) and you have credit card debt with an interest rate of more than 25%, paying down the debt typically makes the most sense.”
Pay down high-interest debt
If your interest rate is high (more than 9%) on your credit card or other loans, use any extra savings to pay down the balance. If you have multiple accounts, you can start working on the one with the highest interest rate first. You can use a different strategy for paying down debt – whatever works for you.
Savings have more time to work for the young
Starting young also means having more time for your investments to be in the market and potentially grow. That puts the power of compounding on your side, which can be powerful.
The young can take investment risks
When you are 25 years old and you are just starting to save and didn’t need to touch the money for 40 years, chances are a dip in value wouldn’t impact you in the short term. Over time, the market might not only recover but could move higher before you need to access your savings.
Experts suggest stocks, bonds, and cash might be a better mix for financial strategy. The risk comes into play for how much of it you are able to tolerate. These are the chances that the value of your investments will go up or down.
If you are saving for retirement and have decades before you stop working, you may be able to take on more investment risk as part of your diversified portfolio.
In a Nutshell
Being young has big implications in matters of financial planning, and huge advantages for the people who make smart decisions. You are able to disprove George Bernard Shaw’s famous quote “Youth is wasted on the young” when you plan early, and make smart moves for your financial future.