Tuesday, October 2, 2007

My advice for young adults

Young people have it tough these days. Escalating educational costs, schools and parents that fail to teach personal finance, and societal pressures to spend make it difficult to get ahead financially. Not to mention, companies are increasingly laying the burden of retirement savings and rising health care costs on workers, who in turn cannot rely on a broken social security system which is headed to the brink of collapse.

Fortunately, young people have a few factors in their favor. The most powerful element going for them is time, which, when combined with the power of compounding, can perform miracles. For most people, this is the simplest path to financial security.

To make the most of the power of compounding, max out your retirement contributions at the onset of your career and don't stop contributing. Those early dollars will generate the most growth later on (assuming you don't cash out or borrow against them), so the more you put in the better off you will be. Invest in aggressive mutual funds instead of more conservative bonds and money market accounts, since you have the time to ride out bumps in the stock market.

Another advantage young people have is flexibility. For example, if the cost of living is high in your area, consider relocating to an area where your salary will go further. CNN Money publishes an annual list of the best places to live, and offers a cost of living calculator so you can compare cities. The easiest time to move is when you're young and mobile, before settling down and starting a family. I chose Phoenix because the cost of living was reasonable compared to California (plus I don't mind the heat!), and I could afford to buy a house while young to start building equity right away. I would probably still be renting had I stayed in California.

If you're attached to your hometown, consider moving back home with your parents until you're in better financial shape. It's a surefire way to pay off debts quickly and start saving for retirement. Some people scoff at the idea of living at home, but if done for the right reasons (i.e., to get rid of debt or save for a house) there's nothing wrong with it.

Be smart about insurance. You won't need life insurance unless you have dependents, but be sure to purchase disability insurance to protect against the likelihood of being out of work due to injury or illness. I've known several coworkers who have had to utilize disability insurance, so it's not a rare occurrence.

These tips should give you a good start toward building a secure financial future. The key is to start early, and save as much as you can. Don't put off saving for any reason, even to pay off debt, because retirement plans limit how much you can put in and don't allow you to go back and make up for missed contributions.

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