Reach financial goals in your 20s and 30s

Be forewarned that you're likely to come across people who'll tell you you're too young to lock up your money in a retirement savings plan. Ignore them. While it's true that you won't be able to withdraw your money until you reach age 59 1/2 without paying a 10% penalty, many plans allow employees to borrow against their retirement savings at favorable rates. What's more, your money will grow tax-free in a retirement plan for years. The benefits of tax-free growth could easily outweigh the penalty you'd have to pay for making an early withdrawal. And if you switch jobs, you may be able to move your 401(k) money into your new employer's plan.

The easiest way to start contributing is to contact your employee benefits office and ask to have a set percentage of each paycheck automatically transferred to your company plan. Try to contribute the maximum allowed by law. If you can't afford to stash away this much, at least contribute the maximum amount for which you're eligible to receive matching funds.

If you aren't lucky enough to work for an employer who offers a 401(k) or a similar company retirement plan (and possibly even if you are), you should start investing in an individual retirement account (IRA). The most you can contribute to an IRA is $2,000 annually; if at all possible, contribute this amount every year. The tax advantages of an IRA are very similar to those of a 401(k). But IRAs don't have all the advantages of 401(k)s, so putting money in an IRA is somewhat less pressing than enrolling in your company-sponsored plan. For starters, with an IRA you don't have the benefit of an employee matching program. Also, you can't borrow money from an IRA before you reach age 591/2 the way you can with most 401(k)s; if you need to get at your money, you'll have to pay the 10% penalty. As of this writing, however, Congress is considering modifying the IRA rules so that savers can borrow from their accounts for medical emergencies and down payments on first homes. If this happens, investing in an IRA will be a no-brainer for anyone who isn't eligible for a 401(k). But even if these rules don't change, the advantage of tax-free growth for many years is extremely beneficial; if you have to make an early withdrawal from your IRA, you'll often still come out ahead, even after factoring in the penalty.

If your employer does offer a 401(k) or a similar tax-favored retirement savings plan, you should contribute to that plan before thinking about an IRA. Once you've hit the maximum on your company retirement plan, you can decide whether or not to contribute to an IRA as well. If you do, you'll get the benefit of tax-deferred growth. However, the fact that you're eligible to contribute to a company-sponsored plan may make your IRA contributions nondeductible, depending on your income level.

4. Reduce your monthly banking fees.
If you're like most people, you don't pay much attention to your bank, despite the fact that it's the center of your financial universe. But by becoming aware of bank charges, you may be able to save hundreds of dollars a year.

Two of the most burdensome bank fees are checking charges and automated teller machine (ATM) fees. To reduce these charges and possibly eliminate them entirely, shop around for a bank that waives them for customers who maintain a specified minimum balance. Some banks require you to maintain the minimum in a checking account only; others will waive monthly checking charges as long as the combined balances in your checking and savings accounts meet the minimum requirement. Either way, look for a bank with a low minimum. While some banks require you to keep as much as $3,000 in the bank to get free checking and ATM use, others require you to keep just $100. Even if you have enough money to meet the higher minimum balance requirements, it still makes sense to find a bank with low balance requirements. That way you won't have to tie up large sums of cash in a bank account that pays a pitifully low interest rate.

Before you switch banks, ask whether yours will waive its minimum balance requirement if you sign up for direct deposit (which would mean that your entire paycheck would be deposited automatically into your checking or savings account each pay period); some banks will. You should also find out if you're eligible to join any credit unions, which are special not-for-profit banks that tend to have lower minimum balance requirements and lower fees all around. For help in finding a credit union, call the Credit Union National Association at 800-358-5710.

5. Build an emergency cushion with an automatic savings plan.
If you find it impossible to save any money, you're not alone. But once you've gotten rid of your high-rate debt and taken care of Crib Notes 2, 3, and 4, it's time to start. A relatively painless way to do it is to enroll in an automatic savings plan. These plans allow you to have money withdrawn automatically from each paycheck and funneled into a bank account or mutual fund. (See Crib Note 6 for a brief discussion of mutual funds.)

If you're trying to accumulate a balance in a savings account large enough to qualify for free checking, see if your bank offers an automatic savings program. If it does, contact your company's payroll office and ask if you can have a portion of each paycheck — say, $50 — deposited into your savings account and the rest put in your checking account. If your employer doesn't offer this option, your bank can probably offer you an alternative way to save automatically. If, for example, you deposit your entire paycheck into your checking account on the first and fifteenth of every month, you might ask your bank to withdraw a fixed amount from your checking account on the sixth and the twentieth and transfer it to your savings account. Use the money in your checking account to pay your living expenses, and consider the money in your savings account off-limits.

Once you've met the minimum balance requirement for free checking at your bank, you're ready to invest in a special type of mutual fund called a money market fund. Money market funds are considered nearly as safe as bank savings accounts and tend to pay higher interest rates. Although they are also sold by brokerage firms and certain banks, you're probably better off with one that's offered by a low-cost mutual fund company. (For my suggestions on specific low-cost mutual fund companies that offer money market funds, see Crib Note 6.) Find out if the fund company and your employer will allow you to have the amount you want to invest automatically deducted from your paycheck and deposited into the fund. If not, the next best option is to have the fund company automatically siphon the cash out of your bank checking account once or twice a month.

No matter what type of automatic savings plan you choose, your goal should be to save at least three months' worth of living expenses in a money market fund before you even think about the more aggressive investments discussed in Crib Note 6. To figure out what three months' worth of living expenses amounts to, use the work-sheet in Chapter 2.

6. Begin investing in stock and bond mutual funds.
Once you have your three-month savings cushion in place in a money market fund, it's time to get a bit more aggressive with your investments. The advantage of stocks and bonds over money market funds is that they've historically tended to earn higher rates of return for investors over long periods of time, and many experts predict that they will continue to do so in the future. You may need these higher returns to stay ahead of inflation. (For a discussion of inflation and why you need to worry about it, see Chapter 5.)

The downside of stocks and bonds is that they're riskier than money market funds. Translation: You can lose money by investing in them. Only you can decide how much risk you're willing to take for the chance to earn higher returns over rime, but one reasonable approach might be to put about hall of your holdings into stocks, one-third into bonds, and the rest in money market funds.

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