Financial planning advice in your 20s

Saving and investing now is the best financial planning advice in your 20s.

If you are in the second decade of your life you are just beginning your economically productive period. Your income is at the bottom of its (hopefully) upward curve while your economic needs are at their greatest. Here are four pieces of financial planning advice that, if heeded will enable you to have an effective financial life.

• Save at least 10% of your income. This is very difficult because the human psyche tends to discount the future. We all seem to feel that having things today is two or three times as valuable as having them in ten years time. But also be aware that there will be lean times in your life and it is up to you to carry some fat over to help you through those times. When you finish working you must have sufficient savings to have the lifestyle of your choice. Save 10% for a minimum standard of lifestyle, 15% for a good standard, 20% for affluent choices. This rule of thumb will work for you only if you start saving for retirement early in your 20s.

• Live within your means and this includes 10% saving from your current income. It really isn’t optional! Save money to buy the things you want in the short term. They can often be bought for a discount when you negotiate with cash. Avoid getting into debt if at all possible but if it is too late for you, work towards becoming debt free as soon as possible. Invest early and aggressively to get the benefits of compound interest. The only way to survive lean times is to have savings set-up that help you to manage your finances.

• Time is your greatest asset when you think of financial planning in your 20’s. At this time in 2009 the economy is at the bottom of the business cycle. Looking ahead you can expect a number of booms to be followed by a number of busts. So plan for the worst and hope for the best. Don’t invest at the top of the market and be proactive in converting stocks and higher risk investments to bonds and certificates of deposit before stock market bubbles burst.

• Unfortunately, you can no longer rely on Social Security to carry you through your retirement years. Investing is not just for people with a large capital sum. Start now and choose safe, long-term investments that put your principal out of reach. This prevents temptation for short term spending. Options to explore are Individual Retirement Accounts that provide valuable tax deferments as well as compounding interest on your investment. Spending temptation can be removed if you go for a 401k. This is a savings plan that automatically deducts from your paycheck and can give you a healthy nest egg later in life.