Savings Advice for Newlyweds

We're newlyweds in our early 20s, and we both work. Our parents want us to get off on the right foot financially, especially saving for retirement. But we don't know where to start. How much should we be saving? Is there a simple rule of thumb? Are there classic mistakes that newlyweds make?

The biggest mistake that newlyweds make is not asking all the good questions you've just posed. So you're already way ahead of the game.

Yes, retirement is a long way off. But your parents are right: Small amounts put aside now will grow into big piles later.

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Rather than save a specific amount, I'd recommend that you each sign up for your employer's retirement plan, such as a 401(k) or 403(b). If your employer matches your contribution, aim to kick in at least enough to capture the match (say, 3% or 5% of your salary).

If your employer doesn't offer a match, each of you should open your own Roth individual retirement account. (It's easy to do. Just get in touch with an investment company and fill out some simple paperwork.) In 2007 you can each contribute $4,000 to a Roth as long as your joint income is less than $156,000.

At your age, you should both invest nearly all of your retirement money in the stock market (another mistake newlyweds make is being too conservative).

A great investment that is also simple is a so-called target-retirement fund. It's a mutual fund that puts your money in a variety of investments that are tied to your anticipated retirement date. The mix automatically changes over time, becoming more conservative as you get older.

Top-notch companies that offer target-retirement funds include T. Rowe Price, Vanguard, Fidelity and American Century (for lots more on retirement planning, go to Kiplinger.com).

Husbands and wives should always contribute to and manage their own retirement accounts; don't depend on your spouse to do it for you. If you don't feel you can afford to put aside 5% of your salary, or the full $4,000 each in an IRA, you can always start with less and boost your contribution as your income increases.

Have your employer or the mutual fund company automatically deduct money from each paycheck, and you'll never miss it.

Next week: Pay off debt or start saving?