Reach financial goals in your 20s and 30s

Do terms like "money market fund" and "401(k)" leave you scratching your head? The new edition of "Get a Financial Life" by Beth Kobliner helps you learn the basic language of the financially savvy. This excerpt offers a cheat sheet on some of the fundamentals you should know about saving money.

Chapter one
Crib notes: A "cheat sheet" for time-pressed readers
If you prefer CNN Headline News to the newspaper and opt for the Cliffs Notes over actual books, this chapter is made for you. It cuts to the chase and offers you the most important steps toward a good financial start. So if you don't have the patience to read the entire book right now, adopting one or two of these strategies will put you ahead of the game.

Of course, as someone's mother once said, cheaters only cheat themselves. And while this chapter is a good launching point, ignoring the remaining eight chapters is a little like relying on a friend's ten-minute summary of Moby Dick — you'll get the basic plot line but never understand it in any real depth. Still, the following crib notes should give you a quick-and-dirty rundown on the basics, I've tried to list them in rough order of importance, but your priorities may depend on your own situation.

1. Insure yourself against financial ruin.
It's not surprising that people don't like to talk about insurance. It's expensive, confusing, and mostly about sickness and death. But if you're interested in getting adequate medical care in case of a serious accident or illness, and would prefer not to bankrupt yourself and your family in the process, there really is no higher financial priority than health insurance.

If you work for a company that offers employees health insurance, you're lucky; participating in your employer's group plan will probably cost you much less than buying a policy on your own, and the coverage you get is likely to be more comprehensive than any individual policy you could afford. You may even have more than one type of health insurance plan to choose from through your employer. When deciding among offerings, make sure you consider not only price but also the type of coverage you will receive. If, for example, you're thinking about joining a type of plan called a health maintenance organization (HMO), inquire about exactly what is covered, ask about the procedure for seeing specialists, and find out what happens if you want to visit a doctor outside the HMO. Although HMOs are generally less expensive, if you come down with a serious illness and want to see a specialist outside your HMO network, you may have to foot the entire bill yourself. Before you sign up for any health insurance plan, talk to coworkers about their experiences with the various options.

If the company you work for does not offer insurance, you'll have to pay for it yourself. If you recently graduated from college, see if you can extend coverage from your parents' plan for a few years. If you're job hunting, at the very least get temporary coverage. If you're employed but your company doesn't offer you insurance, see if there are any organizations you can join (a trade association, for example) that will allow you to purchase health insurance at a group rate. This can be much less expensive than purchasing individual coverage. Since plans vary dramatically from state to state, your best bet if you're on your own is simply to call the major insurers and HMOs in your area and see what they have to offer. Also call Quotesmith (800-556-9393), USAA (800-531-8000), and your local Blue Cross/Blue Shield company for quotes. And if you're having trouble getting coverage because of a medical condition, your state insurance department may be able to provide you with the names of companies that will cover you. (See page 182 for the phone number of your state's office.)

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Another type of protection you may want to consider is life insurance, but only if you have children or if someone else is financially dependent on you. If you don't have dependents, you don't need life insurance. If you do, the type you should buy is called term insurance, which is relatively inexpensive. There are several services that will scan their multicompany databases free of charge and mail you a list of some of the least expensive policies. Try the Wholesale Insurance Network (WIN) (800-808-5810), Quotesmith (800-556-9393), SelectQuote (800-343-1985), and Termquote (800-444-8376). One warning: If you deal with a life insurance agent, be prepared to hear a big pitch for a type of policy known as cash value life insurance. Ignore it. While it's more profitable for the agent, it's probably not a good deal for you.

Depending on your current financial situation, you may also want to consider protecting your earning power with disability insurance. A disability policy will pay you an income (typically 60% to 70% of your current salary) if you're injured or very sick, and are unable to work for an extended period of time. Depending on the state in which you're employed, you may already be covered by a mandatory disability insurance program and/or by insurance provided voluntarily by your employer as part of your standard employee benefits package. Even if you are, it's a good idea to find out how much coverage you currently have, whether it's possible to buy more, and what it would cost you. As with health insurance, the least expensive way to buy disability insurance is generally through an employee benefits plan. If it's not available to you through your employer's plan, look into purchasing some on your own, though you'll probably find that it's pretty expensive. Some companies that specialize in disability insurance are Unum Life Insurance (800-227-8138), Paul Revere (800-843-3426), and Provident Life and Accident (615-755-1011). Also try USAA (800-5318000), the Wholesale Insurance Network (800-808-5810), and Termquote (800-444-8376).

2. Pay off your debt the smart way.
Whether you're drowning in debt or just have a few manageable loans, more often than not the smartest financial move you can make is to take any savings you have (above and beyond money you need for essentials such as rent, food, and health insurance) and pay off your high-rate loans. The reason is simple: You can "earn" more by paying off a loan than you can by saving and investing. Paying off a credit card that has a 17% interest rate is equivalent to earning 17% on an investment — an extremely attractive rate of return. (Actually, it's even better than that; it's the equivalent of earning 17% after taxes.) If you want a full explanation of this concept, turn to page 48. Otherwise, take my word for it.

If you can't pay off your high-rate debt immediately, take steps to reduce the interest rate you pay. One of the simplest ways is to apply for a low-interest-rate credit card. For a list of low-rate credit card issuers, send a request and $4 (check or money order) to Bankcard Holders of America, 524 Branch Drive, Salem, VA 24153, or call 703-389-5445. Another good source is RAM Research's CardTrak, P. O. Box 1700, Frederick, MD 21702; the charge is $5.

If you have several different types of debt — say, a credit card balance on a card with a 17% interest rate, a car loan with a 12% rate, and a student loan at 9% — pay off the loan with the highest interest rate first. One strategy you may want to consider is stretching out your student loan payments over 15 years instead of 10 years by signing up for the Federal Direct Consolidation Loan program. (To see if you're eligible, call the Department of Education at 800-4FED-AID.) This will reduce your monthly student loan payment and leave you with extra cash. Use this money to pay off your credit card balance faster. Once you've gotten rid of your credit card debt, start paying off your auto loan faster. After you wipe out that loan, too, increase your student loan payments to at least their initial levels.

The only time it doesn't make sense to kill your debt is when the interest rate you're being charged is lower than the rate you can receive on an investment. If, for example, you have a special student loan with a 3% rate, you'd be better off maintaining your usual payment schedule on the loan and putting your cash into an investment that pays you an after-tax rate greater than 3%.

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3. Start contributing to a tax-favored retirement savings plan.
Okay, okay — the last thing on your mind is retirement. But if you're lucky enough to work for a company that offers a retirement savings plan like a 401(k), you should take advantage of it.

There are several reasons to participate in a 401(k). For starters, many employers will match a portion of the amount you put into such a plan. That means the company will contribute a set amount — say, 50 cents — for every dollar you contribute, up to a specified dollar amount. That's an immediate 50% return on your money! (In fact, if your company offers such a fabulous matching deal, you should probably contribute to the plan even before paying off your credit card debt.) In addition, the federal government allows you to delay paying taxes on the money you contribute to a retirement savings plan. That translates into an immediate tax break of hundreds of dollars each year. If, for example, you contribute $1,000 to a retirement savings plan, you're entitled to deduct the full amount at tax time, reducing your taxable income by $1,000. If you're in the 25% tax bracket, that's a savings of $250.

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