Life-long financial plan: Tips for us in our 20's plz!

Not close to being retired and no time to really post right now, but my first thing (I'll come back to this) is: don't get into heavy credit card debt. It will be an albatross on your back forever, if you let it.

Im 30 and for a few years I have been paying into an endowment insurance scheme (not too sure what it is but my dad reckons its a good idea and he is good with money)
Basically over 10 years I pay a certain amount into the scheme each month, whatever you can afford, then at the end of the 10 years you get back more money than you paid in.

eg pay £25 a month for 10 years, thats(gets calclator out)£3,000,but after paying all the money in they pay out something like £5,000!!
If you stop paying in/cancel before the time is up you may not get all your money back, certainly not more so read the small print.

There are also things called ISA 's in the UK(cant remember what it stands for, something like Instant saver accounts)You can put £3000 or £5000 into an account and you wont get taxed then,depending on which one you go for you can get anything from 3.8% interest to 5% interest.

As my dad says, always make your money work for you.

Live under your income. Take a certain amount of money out of your paycheck, and invest it.

In the beginning, go for ultra safe investments, such as CDs and T Bills. Start learning about stocks. Go for stocks that have a good potential for growth.

Create a "virtual" stock portfolio on the internet. (Try Yahoo). Track it, and get a sense of how certain stocks, and certain industries, behave. Then s-l-o-w-l-y start to invest, when you feel confident about what you are buying. Read as much as you can about a company of which you are interested. Often, an article about what is happening with the principals of a company can be more valuable than performance charts. Become familiar with both.

Don't use a full service broker. Remember, they are peddling what their bosses want them to dump, especially with their small customers. Ditto, a financial advisor, unless you have so much money that you really need to know the ins and outs of tax ramifications. If you are in that position, I don't think that you would have posted this thread.

Unless you have a lot of money that you don't need, refrain from short term trading. IMO, that is too much of a crapshoot. If you can't contain yourself, decide on an amount that you can afford to lose, buy a stock that you believe will appreciate quickly, hold your breath, and buy it. Oh, and don't forget to keep a big bottle of Maalox in your desk drawer.


Use credit cards for convenience only, and pay the balance off monthly. Remember, if you can't afford it, you should not buy it. Too many young people have mortgaged their lives paying off "toys" that they bought on credit, that are lying in the back of a closet, unused.

If your company offers a 401K, go for it.

When I first met my husband, he told me that he did not believe in straight life insurance. He felt that the money spent on premiums could be better spent on investments. He took out an inexpensive term policy that expired when my son reached his majority. He was absolutely right.

And again, live under your income. You will be much better off, in the long run.

I am in my 40s, but work in the mutual fund industry and have a Masters in Economics. I disagree with Phoenix in investing in items like CDs and Tbills (unless you are planning to save only for short-term). You are young - you have the opportunity to sit out the market if there are downs. Overall in the long-term the stock market increases. If you are in for the long haul, I suggest investing in growth stock mutual funds - look for funds either no-load or low front-end sales charges - also look for low expense ratios. I suggest mutual funds, because it is cheaper for some one who does not have a lot of money. Many you can simply set up an account where you put in as low as $50 a month.

Stocks take a certain expertise - also you cannot diversify unless you have tons of money. Mutual funds allow you do diversify (minimizing your risks) and you don't have to be an expert - portfolio managers do the work for you.

At your age, the best advice I can give you is to start investing in a 401k especially if your place of employment has a matching policy - it is like free money. Basically you put in a percentage of your salary - it comes out pre-tax so you barely even notice the difference. The money accumulates tax deferred - you do not pay any taxes on the earnings until you remove the money at retirement. Being so young, you can put in a small amount with huge results because of reinvesting the earnings.

If there's a 401k available, grab it. Don't borrow from it.

I'll agree with Phoenix on all but the ultra safe investments when you start out. That's a strategy to use towards the end. You can stand some risk in your 20's, if it's offset by the potential gain. If you get something totally safe, the return could well be so small as to get eaten up by inflation.

On 401k and other tax defered plans; that's where you keep your investments that produce taxable income. There's no point in sheltering growth stocks that don't produce taxable income in the first place.

Linkat, roger, I've heard that you can use as a rule of thumb your age when it comes to a mix of investments. E. g. if you're 40, make it about 40% safe investments, slow-growing blue chips. Obviously, you don't change every week.

Oh, and 401(k), absolutely, do it, and if you can invest more than the minimum in it, do so. That money is not taxed, so, let's throw a few numbers out here, let's say you make $10k/year and invest 10% of that, or $1,000 (of course these numbers are low and weird, I'm just using them 'cause they're easy). Let's also assume you're in a 35% tax bracket. This means that your $1,000, if you do not invest it in a 401(k), will come to you as only $650 after taxes!

Also, since you are investing the $$ in a 401(k), it is tax-deferred, so your tax form shows that you made $9,000, not $10,000 in taxable income. Lower taxes, plus an investment. Happiness all around.

Roth IRAs require you to pay the taxes up front. This can, at times, be a good idea, as it saves you from getting hammered when you retire. I'd say, mix it up (that's usually a good strategy, anyway, as that means that if one investment fails, another should be okay, e. g. don't put all your eggs into one basket) if you have a choice of IRAs. And, do invest in an IRA if your company does not offer a 401(k), or if you can afford it, if you are out of work. There's no reason you should stop saving for retirement just because an employer does not offer the option.

Also -- this comes from my Dad, who retired a few years ago -- consolidate the investments as you move from job to job, otherwise you turn 67 or 65 or whenever you retire, and you end up getting dribs and drabs of money from all sorts of wacky places, plus the record-keeping can be tough. Every company, every 401(k) and every IRA must offer a means for you to roll it over to another investment. I did a lot of consolidating the last time I was out of work and currently I have exactly two retirement funds -- the big monster retirement fund of every investment from every employer up until this one, and the 401(k) from this one. I did it that way because I'm not overly fond of the choices I have with my current employer, but I like the payroll deduction. If they change or if I lose this job, I will shovel that money into the other account and not look back.

My husband is similarly situated -- since I was out of work I handled his stuff, too. We also have a joint mutual fund. Mutual funds are not FDIC insured and you can lose the principal, hence ours is not that big.

Also -- your three biggest investments (like they are for the vast majority of people) are your house, your car and any stocks, bonds or retirement funds you have. So choose 'em wisely.

The reason that I mentioned ultra safe investments, is that flushd could start saving now, with little knowledge, and not lose her shirt in the process. A CD can be gotten for a few months. In the meantime, it earns interest, while flushd is studying to become a financial wizard!

Just as a note - although a car may be a big investment money-wise - it is not an investment…it is a depreciatable asset or I like to call it an expense. It does not increase in value - it decreases in value and costs you a whole lot of money. I would never lump a car as an investment.

Start a Roth IRA hon.

The money you put into it today is taxable, but ALL the interest it earns is TAX FREE. When you start to withdraw your money, it's all yours.

If you are at a place in life that you know where you want to live, buy a house, and do the following.

Let's say your payment is $1000 a month. (let's ignore for simplicities sake home owners insurance and property taxes.)

In month 1 of the 360 of your mortgage your interest portion of that $1000 will be (again, just using simple numbers for an example) $970 and the principle (the part of the house you own,) is $30.

The next month, the interest would be $969 and the principle $31, and so on....

But, if in the first month you had sent them $1031 and marked the $31 for principle only, you would have paid the 2nd months payment in advance, what that does is shorten your mortgage by one month off the tail end....

So, if you stuffed away a dollar and change in a shoebox every day when you go to bed, in 3 or 6 months time, you could write a separte check to the mortgage company for the approx $100 to $200 you've squirreled away, and take that much time off your having to pay a mortgage.

That's exactly what I did, and when I had to refinance my house (to get someone's name off the title), I had owned it 7 years, but had paid on it like I was in year 15. And THAT was only doing the extra money thing for 5 of the 7 years.

It got to be like a game.....it really made me think twice about, do I want that Starbucks for $7.00 dollars, or do I want to take a week off my mortgage. Big decesion.

There are some excellent amortization tables online that can give more specifics.

There are also mortgage plans where you split your payment and pay every two weeks....I personally liked throwing change and a little paper in my piggie bank before I went to bed....made for sweet dreams.

Ok! I'm learning, I'm learning! Thanks for so many thoughtful replies.

Currently, I rent and I do not own a car. Sold the car several years ago to save money and it worked. I just haven't known what to do with the money other than let it sit. And I'm gonna need some of that money for a mortgage, possiblely for when I get married/have kids, etc.
I don't like walking into something without having most or all of the cash there. That's why I've been so afraid of getting a house! I don't want to be paying 'out the azz' on a mortgage for the rest of my life.

So, keep it coming. And thank you.

Sorry, Linkat, of course you're right. I meant expense, a car is definitely one of the bigger payouts most people make, but even a history of purchased cars pales in comparison to the purchase of a house.

Ah, a house. There are plenty of mortgage options, including Fannie Mae for first time home buyers. http://www.fanniemae.com/homebuyers/homepath/index.jhtml I love Fannie Mae, that's how we were able to buy a home.

20% down is a good, solid amount, and the beauty of it is that you do not have to pay PMI. What's PMI? It's Private Mortgage Insurance. Essentially, it's money paid in order to assure that you can pay enough money to cover the mortgage (confused yet?). So avoid it if you can or, if you just don't have enough dough for a 20% down payment, do not despair. We did not have enough for 20% down, so what we did was, we paid down the mortgage principal as fast as we could, and were at the 20% level in a couple of years (about 5 years had gone by). We then contacted the bank and PMI was taken off.

But you have to do that - contact the bank, that is. Banks won't take off PMI unless you are proactive and tell them to. Hey, they're makin' money, why would they want to stop? Therefore, you need to keep records and pay attention to the $$.

What do I mean about paying down the mortgage? You can always put extra money into a mortgage, but paying down means that you specify to put the $$ towards the principal. Otherwise, by default, the extra bucks will be put towards the interest. Paying more towards interest makes for a higher tax deduction now, but you pay out later in terms of mortgage term. Paying more towards principal now means that you build equity faster. Why is that good? Because the more of the house you own, the less interest you pay in the long run.

Our house cost us $202,000 in 1995. We paid 10% down, or $10,100. We pushed ourselves to pay down the principal, particularly in the first five years, and made it to 20% equity by about 2000. We then refinanced the house and quit out of PMI. I switched jobs and made more money, and we put in more towards paying down the principal. We refinanced (rates were extremely good) three more times after that. Each time, we either reduced our monthly payment or reduced the term of the loan.

We started off with a 30-year mortgage on which we would have paid about $500,000 in interest. Yes, that's just about 2 1/2 times the cost of the actual home. Now, after four refinances and big paydowns of principal, we are in a 15-year-mortgage (as of 2000 or 2001, so in reality it is more like having had a 20- or 21-year loan) and our total interest is about $180,000, or less than the cost of our home. Our monthly mortgage payment is $1580 or so, we pay $1700 every month, the added $120 goes towards paying the principal down. We have never used our refis for home equity loans. We are just working on paying the house off. We have something like 30% equity now.

Why don't we just pay more per month in an even shorter-term mortgage? Because we are cushioning ourselves in the event of economic problems. The last time I was out of work was 2001 - 2004. During that time, we stopped paying extra $$ in and I bought IRAs as I did not have a 401(k). My retirement did not suffer, and we kept the house and the great credit score that goes with always paying your bills on time. The minute I got this job, we decided what we could afford for extra principal payments, and I signed up for the company's 401(k).

PS Mortgage payments work on a sliding scale, they start off as being at or nearly at 100% interest and, as you pay off the house, they tilt towards principal. The last few years, you are only paying principal. This is why paying down principal in the beginning of a home loan has a great financial impact. As time goes on, it has less and less of an impact. Depending upon how the market looks at what bank savings interest rates are, we might slow down our extra principal payments in the future, as they are having less impact now than they did 5 or 10 years ago. For us, we may be coming close to a time when the balance tips in favor of us just banking the money in some sort of a short-term investment such as a treasury bill, and just paying our straight mortgage.

Oh another thing, PPS, get yourself a safety deposit box when/if you start to buy stocks. It is the best place to put stock certificates, the deed to your house, the title to your car, the original of your birth certificate, etc. This assures that the documents are never lost, stolen or damaged. Ours costs something like $45 per year and our bank just takes the money out of our checking account every December to cover the following year. We visit our stock certificates () about once per year or so, usually to add another certificate from a split. Another advantage of this is that, when it becomes difficult to access these items, it tends to cut down on impulsive trading or selling.

Housing may be a different deal, flushd. Depending on your area, you might see prices rising faster than you can save, and debt might not be such a bad idea, in this case.

Jespah - I have never heard that; the age thing - although the math does come close to what financial planners would suggest, so as a rule of thumb it would work nicely.

Jespah is right that mutual funds are not FDIC insured, however, any investment that is going to make you the least bit of money is not FDIC insured. In order to make more than say 1 - 3%, you will need to invest in something that is not FDIC insured. 401ks are not FDIC insured, for example. So basically you need to take a little risk to get any sort of return. However, as I stated before, if you are in for the long haul, there is low risk investing in a well-managed, diversified growth mutual fund. You can simply look at the history of the earnings over time. Mutual funds must list the total return for the 1 year, 5 year and 10 year (or life if less than 5 or 10 years).

Believe it or not, a mortgage can be helpful. The advantage of a mortgage is the interest you pay is tax deductible. A home, if purchased, in the right area (basically a highly marketable location) can be a good investment in itself. One thing I would suggest prior to a mortgage is to put down at least 20% - that way you avoid payment of the PMI insurance required by the mortgage companies - that money goes right out the door - no tax advantage (ooops jespah and me are thinking the same). Jespah has some great thoughts on the ins and outs of mortgages.

It's o-k jespah, just that working with investments and money all day, I tend to be a bit technical on the definition. Also, I hate the idea of leasing or paying a loan on a car because it just keeps depreciating in value. Whereas a home even though you are making loan payments, tend to increase in value.

This is a very handy site:

www.bankrate.com

Plenty of advice so far.

The most important items are -

live within your means
start saving now

The big advice from the investment gurus is to "pay yourself first". Have money taken out of your paycheck and you will never miss it.

$2000 per year into a retirement account starting when you are 25 means you will have close to a half million by 65. Make it 10% of your salary and you will retire wealthy enough to enjoy retirement.

Me too, for legal stuff. I think they ingrain it in school.