In this segment from Motley Fool Answers, Alison Southwick and Robert Brokamp break down a proper investing and retirement strategy by decade. First, the duo talks about people in their 20s. Early adulthood is often challenging on the financial front, which is why many young people get stuck focusing on short-term issues . . . like this month's bills. But Bro says you should actually be focused on three things: long-term investing for your retirement, paying down debt, and getting your credit score buffed up. He also warns us about the biggest financial mistake people make at this age.
A full transcript follows the video.
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This podcast was recorded on April 18, 2017.
Alison Southwick:So let's start with our listeners in their 20s. Your 20s are an exciting time. You're starting to adult, you're shopping at IKEA, and you're thinking maybe you should maybe, at some point maybe kind of a little bit, start thinking about your finances some more.
Robert Brokamp:Maybe a little bit. The very first thing you should think about, because I'm the retirement guy at the Fool, is saving for your retirement, and if you start in your 20s you should be shooting for maybe 10% if not 15% of your income. That is how much you contribute to your accounts and you can throw in your employer match, as well. So if you're contributing 10% and the match is 5%, then you've hit that 15%. If you wait until you're in like your mid-30s to start saving for retirement, then you have to start targeting like 15% to 25%, so starting soon is definitely better.
The other thing you want to focus on in your 20s is paying off debt. Many people graduate with student loans. They might have gotten those credit cards in college that came with a free t-shirt and then maybe used them a little too much, so you want to focus on paying down that debt.
And one of the best things about paying off that debt is you will start building your credit score, and that is a third priority of your 20s. We've talked about this in previous episodes. Your credit score will determine so much about your financial life: whether you can get a loan, the interest rate on a loan, insurance rates, employers, and all types of things. So this is a time when you want to focus on building a great credit score and the most important thing about your credit score is basically making your payments on time.
Southwick:All right. How much money should you have saved for retirement in your 20s?
Brokamp:[For] the average person in their mid-20s, the average income in the U.S. is anywhere between $30,000 and $40,000. It's not a lot, [but] basically as long as you're starting, that's good. You want to target to have at least about half of your income in retirement accounts by the time you get to your 30s.
Southwick:And then what about a mistake to avoid? What's the number one mistake to avoid in your 20s?
Brokamp:I would say the biggest mistake is getting married too soon. When you look at divorce statistics, according to the Department of Labor, people who get married between the ages of 15 and 22 ...
Southwick:Yes, that's rough.
Brokamp:... the divorce rate is 58%. You wait until between 23 and 28, it is closer to 43%. Once you make it into your 30s or so, it's 36%. So I think the longer you wait, the better your odds that you will stay married.
Why is that good for your finances? Well, divorce is very expensive. It can cost anywhere from a few hundred dollars to tens of thousands. The average is around $10,000 to $15,000. You have to split up all your assets, and of course there's an emotional toll. So one mistake I think people should avoid is wait until you are absolutely convinced you have found the right person to marry.
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