Unsure what to save for first? Follow these top 5 savings priorities

Dear Opening Credits,I need some advice. I am a 24-year-old college student who works but I have not invested in the 401(k) with my company. I have a young child who I would like to start saving money for, and I'd like to start to save money for my own retirement. I have looked at mutual funds and IRAs, but I'm not sure what is best. Your advice would be greatly appreciated. Thank you. -- Sid

Dear Sid,What? No credit card debt to mention and you want to prepare your finances for the future? I'm dazzled!

Seriously, though, I'm not that surprised. Many young people -- more than most people realize, in fact -- are doing very well and have their heads on straight when it comes to money matters.

It's interesting that you're focused on retirement because that's pretty far away. Still, even though you've just dipped your toe into the working world, taking advantage of a 401(k) soon is a superb idea. In general, it's best to maximize a company's plan before moving on to other savings vehicles. Here are just a couple reasons:

  • It's easy. Your employer has already narrowed down the mutual fund options for you from thousands of funds to just a few select funds. Also, signing up is a breeze, and once you do, your contributions simply come out of your paycheck.
  • You may be eligible for free money. Some companies encourage their employees to utilize the plan by matching contributions up to a certain percentage. After a set period of time on the job, you'll be vested and can walk away with all the money they've given.

Company-sponsored retirement plans offer immediate advantages, too. Contributions reduce your taxable income, and the money you earn from those investments grows tax free. This means you won't pay income taxes on it until you start taking withdrawals, when you'll likely be in a lower tax bracket. Talk with your human resources department about getting started. The earlier you begin, the faster you'll build what you need to live off of during your nonworking years.

As for saving for your child, I assume you mean socking money away for his or her higher education. That's great, but do so after you've set up your own financial life. It's all about priorities. Here's a smart order:

Can you do all this simultaneously? Sure. But I wouldn't jump around too much. There is sense to this list's arrangement. With it, you're creating a sound safety net and then slowly but surely filling in gaps.

While you're siphoning cash away for the future, be sure to also be a wise consumer. Identify what's important to you and spend on things that you truly need and value. Use credit wisely by never keeping a balance and paying on time. Oh, and you don't say that you've taken out any student loans to pay for your college, but if you did and don't have any other higher interest debt, pay it off soon as you can. (Add this task between No. 3 and No. 4 in the above list.)

See how simple all of this is? Well, it's not always so easy, Sid. Temptations and unexpected problems will arise. Just prepare for what you can. Remember that you're teaching your little one an incredibly important lesson: With foresight, self-control and money earned via a job you love, you can avoid most financial stressors while enjoying a pretty wonderful life.

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