Financial Planning: Investing Based on Your Age

Though you may think that saving for your kids' future (the good old college fund) is more important than investing in your own future, the kids actually have more options than you do. For example, kids can take out loans or apply for scholarships, but you and you alone are responsible for funding your retirement. So, don't hit delay when it comes to saving for YOU.

Once you're schooled on the different types of investments, you can then learn how those investments should be divided (a.k.a. asset allocation). Your allocation should be determined by two things: 1. How long you have until retirement AND 2. Your stomach for risk-taking.

Here's how you should mix up your investment based on age:

• If you're in your 20s or 30s, you may be comfortable with having 80 or 75 percent of your money invested in the stock market, the rest in a money market fund, which is like cash.
  
  
• If you're in your 40s, you might pare down to 70 to 75 percent of your money tied up in the stock market.
  
  
• By the time you hit your late 50s, you should only have 60 or 65 percent of your money exposed to the market, the rest in cash.
  

Why do it like this? Well, the stock market can be a wacky roller coaster: The younger you are, the more time you have to be risky and ride out market swings (and less likely to hurl at every twist and turn). As you get closer to retirement, you want to be the cranky old lady clutching her purse, protecting your money. Slowly but surely, you'll end up with more of your saved money in cash, and less tied to the stock market. And guess what: You don't need ALL your money when you hit 65. If you're healthy and lucky, you'll still have another 15 to 20 years or so to keep growing your investments further. Just remember stick to these three rules:

1) Never have 100 percent of your money in the stock market.

2) Never have more than 3 to 5 percent of your money in individual stocks.

3) Always diversify. Never allocate more than 15 to 20 percent of your money to any one fund, except for your cash holdings.

The takeaway: The younger you are, the safer it is to take risks because you have more time to make up for any losses. But the older you are, the safer you want to play, which means less money in the stock market and more in conservative investments. For even more investment advice, the U.S. Securities and Exchange Commission has a really helpful beginner's guide for first-timers.

Want more financial-planning tips? Check out our Recession Proofing Boot Camp!