Your 20s and 30s are a critical time to get your finances in order. While many people use these years to start a career and a family, these decades are also an ideal time to get out of debt, buy a home, and start saving for retirement. In addition, it’s time to start an investment portfolio that can provide income for the rest of your life. To do this, you will need to set up an emergency fund, a mid-term savings fund, and a retirement account plan.
Before starting any serious investing, it is critical to keep a supply of easily accessible cash on hand to cover unexpected events. Anything from car repairs to losing your job should be covered from this fund. Ideally, try to have enough money in the fund to cover all of your basic living expenses for at least six months. Since this account can be used for a variety of things, it is important that the money in it be secure and easily accessible.
Because of this, it is generally a good idea to invest this money in either a savings account, money market account, or a ladder of CDs. While the amount of interest earned will be very little, this money will prevent you from taking on high interest debt via a credit card. Once you accumulate a lot of money in this account, you might want to consider placing it into a series of CDs. This means buying a CD every month that matures at the same time interval. For example, some people will invest in a CD every month for a year that comes due in a year. After doing this for twelve months, an investor has a dozen CDs, with one CD maturing every month. If the investor needs the cash that month, he or she can spend it and buy another CD when they are ready to save again. Otherwise, they use the cash to buy a new CD. By doing this, an investor can reap the benefits of getting a good return on his or her short-term savings without running the risk that the cash will be inaccessible.
After saving an emergency fund, the next step is to start working on saving for medium-term goals. This can include saving for a car, a down payment on a house, or the seed money to start your own business. Because it will most likely take years to save this money, and it is not absolutely essential for your survival, it’s generally a good idea to invest it in a more aggressive fund.
A mutual fund, ETF, and/or corporate bond fund can all be good options for this money. Many people choose to start in the stock market, then slowly move money into bonds as they approach their savings goal. While it is possible to lose money in these investments, typically holding onto the investment through a bad turn in the market will result in you earning your money back. This makes it possible to simply wait out the market before making a large purchase.
Finally, your 20s and 30s are a good time to start retirement planning. While retirement might be decades away, by starting to save now you will gain the advantage of compound interest. This will make it possible for you to save less in your 40s, 50s, and 60s. While you can concentrate on other types of accounts later, for now it is a good idea to start with the 401(k) plan you are offered through work and a Roth IRA. These two types of accounts have various tax advantages that make them ideal investment choices for people who are just starting their retirement savings.
Because of your long investment horizon, the money you invest in these accounts can be very aggressive. Consider mutual funds and ETFs for the majority of the money. To balance the account and add some diversity, a small portion should be put into bonds and cash.