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Credit & Debt

A Four-Step Financial Guide to Your 20s

Get on the road to financial success before you reach age 30.

I recently celebrated my 29th birthday. Well, “celebrated” might be an overstatement considering that being this close to hitting 30 gives me a bit of a fright. Don’t get me wrong -- I don’t think of myself as old (claims that 40 or 50 is the new 30 remind me that this is an attractive age to be). But my next birthday is undoubtedly a milestone that will commemorate a more official entrance into adulthood -- complete with all the daunting responsibilities.

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So, before I hit my three-decade mark, I want to review four important steps we should all take in our twenties to grow up and reach financial glory. And if you can suggest any other tips (or you just want to wish me a happy birthday), please do so in the comment box below.

1. Find your career path. Obviously, having a source of income tops this checklist. But by the time you hit 30, you need more than just a job that pays the bills; you ought to have a career, or at least be on track to get one.

If you’re still in school, remember that, as much fun as college may be, your primary reason for being there is to prepare yourself for gainful employment. Make sure you learn some marketable skills before graduation day (excellence at “flip cup” does not count) and hone those skills throughout your twenties. This doesn’t mean everyone has to study accounting, business administration or computer science, which are among the majors most likely to land you a job right out of college, according to the National Association of Colleges and Employers. For example, I earned a B.A. in English -- often (and I’d say unfairly) dubbed a “useless degree.” But I complemented the comprehensive reading and writing skills I learned from my major with additional coursework in math, statistics and economics. Put that all together and ta-da: I’m now happily starting my career as a personal-finance writer.

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If you’re already working, are you in a field you can picture yourself continuing in for the next three, five, ten and 20 years? If not, you need to start looking for a career that works for you. (Just don’t jump plane the Steven Slater way – see Quit Your Job the Smart Way.) Here are a baker’s dozen worth of choices: 13 Careers for the Next Decade.

Once you get started in your choice career, figure out the track you want to follow. What’s the next step up from your current position? How long has it typically taken others to get there? What salary and benefits come with that role? Of course, as this recent recession taught many of us, no matter how well you plot your career path, you may be forced to take some detours. Still, knowing your desired destination will certainly help you navigate through those difficult times.

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2. Build an emergency fund. As a responsible adult, you should abide by the same motto as any good Girl or Boy Scout: Be prepared. In case the unexpected happens, you should always have enough cash on reserve to cover at least three to six months’ worth of expenses. Keep it in a regular savings account, where you’ll have easy access to your funds. You can search BankRate.com for the accounts currently offering the best rates. For example, American Express Bank’s high-yield savings account currently yields 1.3% per year and has no minimum balance or monthly fees. See How Much Cash You Really Need for more about emergency funds.

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3. Create a plan to repay your debt. I won’t pressure you to pay off everything you owe before you turn 30. After all, according to Sallie Mae, college graduates left school in 2008 with an average credit-card debt of $4,100, up from about $2,900 in 2004. And 10% of that same graduating class also carried $40,000 or more in student debt, according to the Project on Student Debt, an advocacy group.

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But if you’re buried under student loans or crippled by credit-card debt, you need to at least figure out how to tackle it before you turn 30. “With cleaning up debt issues, the most important thing is to have a plan and not just assume it’ll go away,” says Carlo Panaccione, a certified financial planner based in Redwood Shores, Cal. Often, Panaccione encounters people who count on a big future bonus or bump in salary to pay off large debts. “Well, that may never happen,” he says. A better strategy: Set up a schedule and figure out how much you’ll need to pay each month to clear the debt by your target date. For more information on paying off school loans, see Digging Out of Student Debt.

4. Start funding a retirement account. Most people don’t start planning for such long-term goals until they’ve reached their forties, says Panaccione, “and then they panic-save later on.” Gentle readers, be the tortoise: Choose the chill path to savings and take advantage of this 20-year head start. Even if you can afford to put away only a small amount each month, slow and steady can win big.

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For example, if you start saving just $150 a month at age 25, assuming an 8% return, you’ll wind up with $527,142 by the time you turn 65. Waiting an extra five years to start saving will cost you $180,766. Even if you crank your savings up to $200 a month starting on your 30th birthday, you’ll only net $346,376 by 65. And if you wait until you’re 40 to start saving $200 a month, you’ll have just $191,473 when you’re 65. Crunch your own numbers with our 401(k) calculator.

Ideally, you’ll want to save much more for retirement -- about 10% to 15% of your income would be best. But exactly how much you’ll need depends on what kind of lifestyle you’re planning for your golden years. For help figuring out a dollar amount, try our Retirement Savings Calculator.

The best place to build your retirement account would be in a 401(k) or a Roth IRA. Both vehicles offer appealing tax advantages, but the employer-sponsored 401(k) may also score you free money if your boss makes a contribution, too. To find out more about these types of accounts, see Why You Need a 401(k) Right Away and Why You Need a Roth IRA.

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