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Planning in your 20s

Start saving early

Consider this crazy math: Assuming the same hypothetical rate of 5% return on the savings, a 25-year-old who invests $2,000 a year for 13 years can end up with more by the age of 65 than a 37-year old who invests $2000 a year for 29 years, even though the 37-year old invests more than twice as much!1

That head start is what makes all the difference.

And here’s why:

When you save or invest in a given year, your money earns interest. The following year, you earn interest on your original money plus the interest from the year before. In the third year, you earn interest on your original money and interest from the first two years (and so on for years four through “however many you live”).

This is what’s known as a compound interest. And it’s one of the reasons you should start saving now, when you have decades ahead of you for that money to grow. To free up some cash for your initial investments, here are a few simple things you can start doing today:

  • Be real: First things first. Be realistic about what you actually need and what you just “sort of want.” Invite your friends to dinner and have each of them bring a dish (it’s cheaper than takeout and a lot more fun). Learn to mend your clothes (and add your own touch to them). Save your favorite cup of designer coffee for when you absolutely need it—you’d be surprised how quickly you can afford a term premium.
  • Embark on a tall order so you don’t come up short: Take the time to sit down and identify your goals: short, medium and long. Define them in clear absolutes: saving up for furniture, a car, or a honeymoon (short term); building a nest egg for a house or apartment (medium term); planning for kids, their college, your retirement (long term).
  • Give yourself some credit: In order to qualify for the best interest rates on a credit card, car loan or mortgage, you’ll need to build a solid credit history. So pick a single card and stay on top of the payments.
  • Cut the cord: If a parent or role model is helping you manage your finances, it’s time to take the reins and put yourself in charge. After all, whoever controls your finances controls your life—and your future.
  • Think before you marry: Remember, your spouse will be your co-money manager, so financial values and views on spending and saving are something you should discuss before you consider a ring.
  • Put your health first: Make sure you have continuous (i.e., no breaks in coverage) health insurance. Don’t let an unexpected health issue and the resulting medical bills diminish your savings.

20s guidance from the professionals at New York Life:

Irma Perez, Agent, New York Life Silicon Valley General Office: “You’ve heard your mother say if you have your health you have everything, and it’s true. The younger and healthier you are, the more likely you are to qualify for life insurance at a lower premium. So if you’re in your 20s, then now may be the best time to start.”

Eric Chappell, Agent, New York Life Montgomery, Alabama General Office: “I tell young people that their biggest investment is their human capital, or all the earning potential they’ll have over the next 40–45 years. So at this stage my guidance to them is you must protect your human capital. That, and consider term insurance in your 20s with an option to convert to permanent life insurance later.”

Joel Steele, New York Life Agent, South Jersey General Office: “When it comes to retirement, the earlier you save the better off you’ll be. A smaller amount saved for a longer period of time is worth more than if you waited to start saving larger amounts later. The sooner the better so whatever you can afford, start with that.”

1For illustrative purposes only and does not represent performance of any particular investment. The example assumes no additional savings or withdrawals and assumes annual compounding of interest. The example also does not take into consideration taxes or any fees/expenses associated with investing.