To Get Rich, Start Saving In Your 20s [Part 2]

Be aggressive with your investments

Make sure to invest your money shrewdly. According to Hewitt, workers 18 to 25 typically invest 35% of their retirement savings in bonds. Yet bonds have historically returned 5.4% a year -- right around the risk-free rate and just ahead of inflation. That's practically sticking it in a jelly jar! Stocks, meanwhile, traditionally have grown at an annual clip of 10.4%, according to Ibbotson Associates, an asset allocation service that's part of investment ratings agency Morningstar.

Instead, play it aggressive, and put 90% of your investments in stocks, says Ellen Rinaldi, executive director of investment planning and research at mutual funds giant Vanguard. Stocks are interchangeably referred to as equities, since as a stockholder you own a slice of the company's value in the market, its equity.

"From an allocation viewpoint, someone in their 20s has a very long horizon, so they can handle the ups and downs of the market," says Rinaldi. "They can recover from a downturn. As a result, they should be heavily invested in equities."

You can hedge against the risk of loss by diversifying your investments. That's a fancy way of saying you want to own as many different types of stocks as possible, and it's a message that will hold true throughout your lifetime. That means steer clear of buying a single stock and look to mutual funds, a tradable vehicle made up of sometimes hundreds of different investments in widely varying quantities. They could be made up entirely of stocks, bonds, a combination of both or simply track the market by holding equal amounts of all shares in a given index, known as an index fund.

So-called lifestyle or life-cycle mutual funds make it especially easy for novice savers to buy a diversified array of stocks that are tailored to their age and retirement goals. That's because these funds are set up to automatically pick and choose the equities in the fund, and to rebalance those holdings over time, buying and selling shares in order to maintain the advertised mix of risk and return (or caution and predictability) by age bracket.

"Look for retirement funds targeted to your age bracket. They'll be much more aggressive for someone in their 20s," says Rinaldi. "If you just look for a balanced fund, you may wind up with 40% of your money in bonds, which is a typical mix for these funds."

Get educated

Meanwhile, don't be embarrassed to admit that financial talk can seem confusing. After all, financial know-how is not genetically encoded and, unless someone has taken the time to teach you about finance, you'll need to do a little learning. And now that you're starting to make and save money, this is the perfect time to educate yourself.

More than a third of companies now offer employees access to advisers who can help choose investments that will be most appropriate, according to Hewitt. These advisers can explain what holdings are in a particular fund and why they'd recommend one investment over another. Read books, articles or financial Web sites. The more you know, the easier it will be throughout your career to make solid, informed decisions.

"I think the reality is most parents are more inclined to talk to their kids about sex education than talk to them about finance or saving for retirement," says Jones. "That's just not a conversation people have, so a little Finance 101 is probably a good idea."

Build a strong defense with an emergency stash

What's next? Start amassing an emergency fund so you don't have to rely on credit cards -- and possibly bury yourself in debt -- in the event that your car dies, your roommate comes up short on rent or you suffer some other financial mishap. Ideally, you'll stash up to three months living expenses, but the important goal is to save something. You can help stay on track by having automatic deposits made to your emergency account.

In the meantime, keep an eye on spending. Those splurges can add up fast and will prove to be a huge drain on future savings. What's more, if you pile on debt, you'll wind up wasting a lot of money on interest and fees that could be better spent elsewhere.

Avoid debt

If you're really struggling to stretch the paycheck to set something aside for retirement, this is the time to make some changes.

Give your budget needs a major overhaul. Consider getting a roommate or picking up an extra job for the time being. Big changes now, coupled with consistent saving over time, will reap huge rewards down the road, says Jones. He speaks from experience. Jones took a year off from college to work so he could pay off credit card debt. It wasn't easy but, he says, "I graduated debt-free."

Lamb has already seen how a little financial discipline reaps big rewards.

"Making my bills is my No. 1 priority before anything else. I don't buy new clothes. I cook at home. And I don't drink, which is a big money-saver. People go out and will spend $100 on alcohol in one weekend. I don't do that," she says.

Yet she does let herself have occasional "big purchases," like a house recently bought with her fiance.

"I really wanted one," she says. "And I made it my goal."

This article was reported and written by Leslie Haggin Geary for Bankrate.com.
Published May 25, 2007