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What Every Young Person Ought to Know About Starting a Savings Plan

Over at CnnMoney there’s a great article about starting a savings plan. The author provides three things that everyone person should do to get started on saving for the future.

  1. Sign up for your savings plan at work. Most employers provide a 401(k) plan. Two things make 401(k)’s awesome. First, it makes savings automatic. Second, usually your employer will match a portion of what you put into the plan. If you employer doesn’t offer savings plan, sign up for Roth IRA at your bank. Roth IRAs have significant tax benefits. Withdrawals up to the total of contributions are federal income tax free, and withdrawals of earnings (anything above the total of contributions) are often free of federal income tax. You can invest up to $4,000 a year in an IRA.
  2. Invest smart, but keep it simple. The fancier you try to get the more likely you’re going to lose money. The easiest thing you can do is invest in target retirement funds. These are mutual funds with a mixture of stocks and bonds depending on when you want to retire. When you first start out, the fund has more stocks than bonds. As you get older, the fund shifts to more bonds than stocks, thus making your investments more conservative. You can also try mutual funds. Cannoned offers a list of the 70 best mutual funds on there site. The key with investing is to make it automatic. Set up an automatic deposit with your brokerage firm.
  3. Resist the urge to tinker. Don’t try to beat the market. Today’s hot stock will soon be tomorrow’s big dud. Just stick to simple mutual funds and you’re bound to get a good return on your investment. The author of the article does suggest to “re-balance” your “holdings every year or so by selling shares of funds that have done well and putting the proceeds into ones that have lagged to bring your mix of stocks and bonds back to the appropriate proportions.”