By G.E. Miller, Guest Columnist
If you're in your twenties, every financial action you take -- from accumulating debt, to saving for retirement, minimizing your expenses, or even negotiating a lower rate on your mortgage -- is compounded over time.
No pressure.
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But really, it's not time for excuses or to claim ignorance. Decades later, all of those woulda, coulda, shoulda thoughts won't add up to a dime.
Here are three ways you can start to optimize your finances.
1. Get your employer's 401(k) match and max out for the win! There is no better time to stockpile savings for retirement than in your twenties, particularly if you do not have children or a mortgage to balance yet. The power of compound interest is something you can't cram for like a final exam when you're in your fifties or sixties. Once you lose time, the power of compound interest is gone forever (see the Kiplinger.com tool The Power of Boosting 401(k) Contributions).
Maxing out your 401(k) contribution is encouraged but not easy to do for most. At the very least, take full advantage of the 401(k) match that your employer is offering you. Most employers who match employee contributions do so at the rate of 50% or 100% up to a given amount. You could invest in the stock market for the next 70 years and never get a 50% or 100% return on your investment in a given year, but that is what you are effectively getting with your employer's match. Free money!
This year ratchet up your 401(k) contribution as much as you can comfortably stomach. For the first time in four years, the IRS will increase the maximum 401(k) contribution allowed by employees. The 2012 maximum 401(k) contributionincreases to $17,000, up $500 over the 2011 401(k) maximum contribution. The increase also extends to 403(b) and 457(b) plans. See Retirement Account Contribution Limits for more information
2. Grab the saver's credit (while you still can). The unsung hero of tax credits has to be the Saver's Credit (aka the Retirement Savings Contribution Credit). If you qualify, you're turning your back on free money if you don't contribute to an IRA. The government will pay you in the form of a tax credit of up to $1,000 for a retirement account contribution of $2,000. This credit, which lowers your tax bill dollar for dollar, is available to lower-income taxpayers (highly correlated to younger folks), so grab it while you can.
It's still not too late to take advantage of the credit for 2011 if you contribute to an IRA by the 2011 tax deadline April 17. What better way to start 2012 than by getting a tax credit for contributing to your own retirement?
To learn more about the income limits for qualifying, see A Tax Credit for Retirement Savers. Then fill out IRS form 8880 to see how much of a credit you will receive.
3. Switch to your employer's high-deductible health plan, and start building your HSA funds.
If you have a high-deductible health plan (HDHP), you can reap tax benefits by contributing to a health savings account (HSA). Your health plan must have a deductible of at least $1,200 for individual coverage ($2,400 for family coverage) for you to make a pre-tax contribution to an HSA. The maximum you can contribute to an HSA increases from $3,050 to $3,100 per individual and from $6,150 to $6,250 per family this year. These tax-advantaged accounts that let you save for medical expenses are similar to 401(k)s in a number of ways: The balance rolls over from one year to the next (unlike an FSA), you and your employer can contribute funds, and you own it and can take it with you when you leave.
If you don't have a high-deductible health plan, you may want to consider switching to one during open enrollment later this year. You pay a lower premium in exchange for the high deductible you must hit before your insurance kicks in. But you can use the money in your HSA to help you cover out-of-pocket expenses. If you don't have health complications and don't visit the doctor often, HSA's can allow you to build a nest egg for future medical expenses. And in a 20somethingfinance post, I describe how you may even be able to hit health care nirvana.
I tackle these issues and more on 20somethingfinance.com and on Facebook and Twitter, so stop on by to say hi!
G.E. Miller is the author and founder of 20somethingfinance.com, a personal finance blog that focuses on financial issues that young professionals (and beyond) encounter. He aims to be debt free, including mortgage and student loans, by age 30 and obsesses over financial freedom. He enjoys wine, beer, his wife, walking his dog, and The A-Team.
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