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Dear Dave,

When I went to get my income taxes done this year my tax preparer suggested that I start investing in my 401(k) plan at work and that next year she would help me set up an IRA. What exactly is an IRA? I know it has something to do with retirement. Do I really need that right now? I am only 20 years old. Any advice would be appreciated.

Melanie in Kalamazoo, MI

Dear Melanie,

I will give you the same advice I would give anyone at any age. You should start saving for retirement as soon as you can. At your age, you could easily retire a millionaire if you are wise and start making the right decisions now. Did you catch that? I said you could retire a millionaire.

The first thing you should do is to get $1,000 in the bank. This will be your emergency fund. This way, if your car breaks down or some unexpected emergency comes up you will not have to scramble or mess up your budget to cover it. Then you need to pay off any debts that you have right now. Become debt free as soon as possible. The best way to build wealth and prepare for your future is to be free of all debts, and never borrow money…ever. This frees up your entire income, which is your number one wealth-building tool.

If your company offers a 401(k) and a match, you should invest the maximum possible amount. A 401(k) gives you nothing unless you put in something, so for goodness’ sake you need to put something in. The 401(k) usually gives you four to ten options of where to invest. I would choose the mutual funds options every time. Invest in four types of categories of mutual funds: Growth, growth and income, international and aggressive growth. Invest 25 percent of you money in each of those categories in order to keep your money diversified, so that all your eggs are not in one basket. Invest in mutual funds that have good, long track records, too. You will need to do some research, but believe me it will be worth it.

After you are funding your 401(k) then you should look into a ROTH IRA, which is an Individual Retirement Account that grows completely tax-free. Above that I would challenge you to get serious about it. You are in a position to literally change your family tree. Without any payments, you have the power to save so much money that your children’s children will have an inheritance. If you are smart with your money now, you can put yourself in a position to retire with dignity and leave a legacy for generations to come.

-Dave

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