No time like the present.

Gen Xers should start investing for smooth sailing in the future

CONGRATULATIONS! YOU'RE IN YOUR 20S. AT LONG last you've finished school and escaped the parental microscope, with few responsibilities besides yourself. Landing your first real gig has given you the funds to live the life you've always dreamed of. The phat crib, the fly car, the designer clothes--it's all about you.

But hold it. What about your future? Do you have enough money for emergencies, that wedding you're planning or a down payment on a house? What about retirement? The more money you save in your 20s, the less you'll need to put aside when you get older. A study conducted in July by Scudder Kemper Investments revealed that people age 22 to 33 are more financially savvy than preceding generations. Seventy-one percent of Generation Xers regularly save a portion of their income, according to the study, with 67% saving money outside of 401(k) plans, about the same frequency as baby boomers.

However, when it comes to African Americans in their 20s, the outlook is somewhat different. A study commissioned by Ariel Mutual Funds and Charles Schwab & Co. and released in May found that African Americans, particularly women, still lag significantly behind whites in investing and saving their money.

Investing a set amount of your income each month will put you on the fast track to a stable financial future. Read on to find out how much of your hard-earned cash you should be putting to work in the form of stocks, mutual funds and other investment vehicles.

RIDE THE BULL

Because you're young and won't need the money right away, you can put much more of your investment dollars into aggressive investments like stocks, rather than more conservative investments such as Treasury bonds or certificates of deposit.

As a general rule of thumb, subtract your age from 100% to determine how much of your money you can allocate to aggressive investments, advises Simone Thompson of Edward Jones Investments in Brooklyn, New York.

If you start investing in your 20s, you'll end up with more money--and perhaps be able to retire earlier--than your older counterparts. Investing $100 a month beginning at age 25 at an assumed rate of return of 12% will grow to more than $1 million by age 65, says Thompson. If you wait until age 30 that $100 per month will only amount to $649,000 at age 65. (You'll need to invest $200 per month to reach the $1 million mark.)

But before you get started, financial planners say, you should get out of debt and save three to six months' worth of your salary for emergencies. It's become a cliche by now, but the rule is: pay yourself first. Martin Harris, president of M.H. Harris Financial Planning Services in New York City, offers the following guidelines: Everyone should invest 5% to 10% of their take-home pay. Rent or mortgage payments shouldn't eat up more than 28% of your income. Other debt payments such as car or student loans and credit cards shouldn't exceed 36%.

Even if you can't afford to invest $100 or more each month, don't let that stop you. It doesn't matter how much you save, says Thompson, as long as you' save something. There are many mutual fund firms, such as T. Rowe Price Associates in Baltimore (www.troweprice.com), that will allow you to invest as little as $50 a month. Thompson also recommends dollar-cost averaging, a method of steadily increasing the amount you own by investing a fixed dollar amount in an individual stock or mutual fund each month.

EARLY BIRD

Daniel Forbes of Queens, New York, is off to an early start. He doesn't want to punch someone else's time clock for much longer and plans to retire in four years to work for himself. But first, he has to graduate from college. You see, Forbes is just 22 years old. So just how does he expect to accomplish his aggressive retirement goal? By investing in the stock market. The Pace University finance major has been investing since his days at Brooklyn's Sheepshead Bay High School, where a business administration class piqued his interest in the stock market.

In 1994, he invested about $1,400 he'd earned from a part-time job in his first stock, Showboat Casinos, which has been acquired by Harrah's Entertainment Inc. (NYSE: HET). He made a profit of $700. His skills impressed his father, who gave him $5,000 of his own retirement savings to manage. Forbes nearly doubled it by investing in Lucent Technologies (NYSE: LU), the AT&T Corp. spinoff. He's had other successes, including buying 50 shares of E*Trade (Nasdaq: EGRP) at $47 and selling the shares several months later at $107. Now Forbes regularly invests $400 a month and his portfolio has grown to $12,000. He currently owns five stocks: E*Trade, AmeriTrade Holding Corp. (Nasdaq: AMTD), Rbid (OTC-BB: RBID), Efax.com (Nasdaq: EFAX) and Southwest Securities Group Inc. (NYSE: SWS), which operates themydiscountbroker. com Website.

Not bad for a guy who works part-time, making $9.66 an hour. Forbes, who works in the back office of Bear Stearns Securities Corp., reconciling institutional accounts as well as receiving and delivering institutional trades, says he makes most of his money by trading through an account with his employer. Forbes has about $2,000 in credit card debt and $10,000 in student loans which he expects to pay off with profits from trading. He isn't liquidating his portfolio; he's done so well, he says it won't hurt to take a couple of dollars off the table. Financial planners warn not to take too much. "You don't get into the market for only one or two years because that doesn't give you the time horizon to maximize any profits that might come your way," says Harris.

THE FUTURE IS NOW

Not all 20-somethings are footloose and fancy-free. Twenty-six-year-old Chrysta Stotts is a homeowner and a single mother of a seven-month-old son, Haydn. When her father suggested she buy a house, Stotts thought he was crazy. But as she sits in her three-bedroom townhouse in Suitland, Maryland, she now realizes Dad is about as crazy as a fox.

Stotts, a consultant in the Falls Church, Virginia, office of consulting firm Birch & Davis Associates Inc., bought her house in April of 1998 for $115,000, borrowing $3,000 from her 401(k) plan to help with the down payment. It has been a wise investment. Almost $900 of her monthly payments of $1,000 is tax deductible. That's almost $11,000 a year.

In Stotts' case, it's a little harder to find extra money to save. With added responsibility come added expenses, notes Harris. But someone in her situation should follow the general rules of thumb for saving and investing. Stotts currently socks away about 7% of her $47,000 salary in her company's 401(k) plan and has about $9,000 invested. Stotts credits seminars at her first job after college with Rheem Manufacturing Co., a Milledgeville, Georgia, air conditioner and heating unit manufacturer, with planting the idea to participate in the plan. The gist was you're nuts if you're not putting away money for your future, she recalls.

As an additional investment vehicle, she may also want to consider an education IRA (individual retirement account) to help pay for her son's education. Education IRAs allow you to put away up to $500 a year for a child under the age of 18. Gains in education IRAs accumulate tax-free and can be withdrawn tax-free.

GET ON THE BALL

If you have dreams of retiring early like Forbes or of buying your own home, like Stotts, get started investing. Here are some quick tips to get you on your way:

* Bone up on investing basics. Reading books such as The Complete Idiot's Guide to Personal Finance in Your 20s and 30s (Alpha Books, $18.95) and Personal Finance for Dummies (IDG Books, $19.99) can help you, well, get a financial life.

* Plug in. Many Websites offer investing tips, including Yahoo! Finance (http:// finance.yahoo.com) and Microsoft Network's Money Central(http://moneycentral .msn.com). Morningstar Inc. (www.morningstar.net) operates a comprehensive site that ranks and offers advice about mutual funds. Most mutual fund firms also have Websites. Two of the largest mutual fund firms are Vanguard Group (www. vanguard.com or 800-871-3897) and Fidelity Investments (www.fidelity.com or 800-544-6666).

* Determine your risk tolerance. Ask yourself how much money you would be comfortable putting at risk if stock prices go down. "Young people shouldn't panic because they have a longer time to recover if they make a mistake or if the market goes down," says Harris.

* Join your company's 40l(k) plan. "That's just a no-brainer," says Thompson. "You never see the money. It comes directly out of your paycheck." The money comes out on a pretax basis so you're reducing your tax bite.

* Invest automatically. Many mutual fund firms will waive their minimum investment requirements (usually $1,000 to $3,000) if you set up automatic monthly payments--as little as $50--from your checking account. That way, says financial planner Harris, you make a one-time decision to invest (and how much to invest) and the rest happens automatically. Stein Roe Young Investor fund (see "Investing as Child's Play," Moneywise, October 1998) targets young people and offers a newsletter that takes the mystery out of investing. For more information about the fund, visit the parent company's Web site: www. steinroe.com or call 800-338-2550.

* Relax. Thompson of Edward Jones sums it up this way: "Buy quality stocks, invest them for the long term and diversify and you will always make money in bull or bear markets." And there's never been a better time to get started. Says Harris: "With the stock market getting returns of 20% a year and better, people have a greater chance of doubling their money in two or three years."

to-do list

Put more of your money into higher-return investments like stocks and equity mutual funds

Save as much as possible through your 401(k)

Since you're young, you can start with small amounts and increase them as you get older

asset allocation - 20s

Single mother, 26 * lives in Falls Church, Virginia * makes $47,000 a year as a consultant * has already socked away about $9,000 in her 401(k) plan * puts 7% of her annual salary into the plan * just bought a $115,000 house, borrowing $3,000 from her retirement plan for the down payment * pays about $1,000 a month in mortgage and maintenance.

You should build your investment portfolio around your 401(k) plan. Investing pretax dollars in your plan will lower your taxable income every pay period and give you tax-sheltered growth. Increase your 401(k) contribution to the maximum. If you have adequate monthly cash flow after making the maximum contribution, consider a systematic investment plan. Repay the loan from your pension plan as quickly as possible. After the loan is repaid, start putting $50 a month in a growth mutual fund, like Goldman Sachs Capital Growth, for your child, and $100 a month for yourself. Mutual funds will give you a reasonably diversified portfolio.

SOURCE: MARK SPRADLEY, LEGG MASON WOOD WALKER

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