If you’ve laid the foundation for financial success in your 20’s, your 30’s should be a breeze right? Well, many things may have changed since your 20’s, you may have gotten married, settled down, had kids, and bought a home. These major lifestyle changes bring with them many new financial obligations and decisions to be made. Will you pay for your children’s college? Does that come at the sacrifice of saving for your own retirement? Have you put together a will or basic estate plan? These are all questions that likely need to be addressed. This article will explore the steps to financial success in your 30’s!
1. Make the Rent vs Buy Decision
Buying a home is typically the largest single purchase most people will make in their lifetimes. It’s a major financial and life decision. In most cases, when you buy a home you’re choosing a place to settle down and maybe even start a family. Millennials, in general, are notorious for waiting to buy homes AND start families. It’s not unusual for this to happen in our early 30’s.
By now, you’ve had the time to pay off student loan debt, make significant progress in your career, and feel comfortable financially to make a down payment on a home. However, I caution you to not feel obligated to buy a home. If you still travel a lot, are unsure where your career will take you, or don’t want to commit to living in a particular city just yet, buying a home isn’t a necessity to future financial success!
The opportunity cost of a down payment on a home can be significant if you invest correctly as a young individual. For example, if you had $120,000 available for a downpayment, but you weren’t ready to buy yet, what could $120,000 earn invested elsewhere? Over long periods of time, the return is historically greater when invested in equity markets compared to real estate. This is why I argue buying a home shouldn’t be viewed as an investment, but a lifestyle choice!
2. Start Saving for College
If you’ve started a family and decided that saving for your children’s college education is important to you and your spouse, now’s the time to get started! If your kids start college at age 18, there’s a limited amount of time to invest designated funds for college expenses. The earlier you’re able to start saving the fewer actual dollars you’ve hopefully had to save due to the power of compounding.
There are a few ways you can start saving for college expenses. The most cost-efficient way is through a 529 plan, which allows you to make after-tax contributions to the account, invest the funds, and use them tax-free for qualified education expenses. The downside to a 529 plan is if your kids decide not to attend college, the funds are locked in the account and subject to a 10% penalty on withdrawal if used for anything other than education expenses (earnings only).
An alternative to saving in a 529 plan is through a taxable brokerage account. Where you as the parents still “own” the account and can use the funds for whatever expenses you please without incurring a penalty should your children not attend college. However, you lose out on the tax-free withdrawals that a 529 allows for the educational expenses, which can be significant over time.
3. Don’t Spend More, Spend Better
Now that you’ve reached your 30’s, you’re likely making more money than ever before. Hopefully, you’ve followed our advice of “paying yourself first” over the course of your compensation increases. Meaning, you’ve increased your savings in congruence with your compensation increases.
Another piece of advice to ensure you’re avoiding the “lifestyle creep” is to align your spending with what you value! The concept seems innate, but you’d be amazed at what expenses could be cut if you took the time to understand what you really value spending money on.
It could be something as small as paying for cable television. Maybe you hardly watch live tv at all, and you can simply pay for streaming services. Not only will this practice likely save you money, but you’ll also feel more satisfied with your financial decisions because they’re aligning with what you value! Instead of spending more as your compensation increases, focus on spending better.
4. Max Out Your 401(k)
If your compensation has grown, so should your contributions to your retirement accounts. Specifically, maxing out your 401(k). In your 30’s, you still have roughly 25-30 years until you’ll be withdrawing from your 401(k) to supplement your retirement lifestyle. That’s a long time for your money to remain invested, compound, and benefit from tax-deferred growth. The more money you put in TODAY, the greater that balance will be in retirement. Playing “catch up” in your 40’s or 50’s doesn’t quite have the same financial impact as far as growth is concerned because there’s less money compounding for a shorter period of time.
If you’re able to max out your 401(k) in your 30’s, you’ll likely be in excellent financial shape.
5. Ensure You Have a Basic Estate Plan
Just because you’re still young and in your 30’s doesn’t mean that a series of unfortunate events can’t hit at any moment. Unfortunately, that’s a fact of life. What’s important is having a plan in place should anything unfortunate occur. Basic estate planning documents such as a will, health care power of attorney, and ensuring beneficiaries are listed on accounts, are important and can soften the blow of an already stressful or negative situation.
Putting a will in place will help ensure all your assets are passed according to your wishes. If you’re married, they’ll likely go to your spouse. If not, then it’s up to you to designate where. Without a will in place, your family can be left with questions about how to distribute your assets which can cause even more stress during an already stressful time.
A health care power of attorney is especially important if you’re not yet married. It designates someone to make decisions regarding your health and care you receive should you become incapacitated and unable to make decisions yourself.
Lastly, ensuring your beneficiaries are up to date on retirement accounts or insurance policies is key. If you recently got married, you’ll want to update your beneficiary to your spouse. Or if you had a falling out with a particular family member whom you had previously designated, be sure to make the update.
6. Review Insurance Needs
Along the more morbid topics, we, unfortunately, have to discuss with clients is the necessity of life insurance. Again, you never know what life will throw your way, and in the unfortunate case we pass away earlier than expected, we all want our loved ones to be taken care of in our absence. It’s even more important if you’re the primary breadwinner for the household since your income can no longer be relied upon.
Fortunately, because so many people see the need for life insurance, the premiums for term insurance policies are relatively low for people in their 30’s. You can purchase policies that remain in force until your retirement and provide enough coverage should anything happen.
Another often overlooked insurance need is disability insurance. The council for disability awareness estimates that nearly 1 in 4 people in their 20’s will have some sort of short-term or long-term disability throughout their careers. This can range from medical, accidental, or even pregnancy reasons. The key is to have coverage to replace your income while you’re disabled. Your employer may offer group disability coverage, but that raises the question, how much coverage is enough?
Depending on your unique situation, anywhere from 50-80% of income replacement for disability insurance is advised. If you have several debt obligations, you’re likely a good candidate for 80% income replacement. If you have zero debt obligations and 6 months of cash in an emergency fund, you’re likely okay with 50% coverage. Don’t ignore insurance needs just because they seem unlikely to happen to you, without policies in place it’ll just make the situation that much worse.
7. Review Your Investments
It may be time to look into hiring a professional investment advisor, not only for assisting in all these financial planning needs but for advising on your investments as well. If you’ve built up a significant investment portfolio consisting of retirement accounts, taxable brokerage accounts, and potentially some form of equity compensation through your employer, it’s probably a good idea to seek a professional opinion.
You may not realize the amount of risk you’re taking in your portfolio if you haven’t rebalanced before. Or, it’s possible you may not be taking enough risk based on your time horizon or necessity for the funds anytime soon.
Most importantly, the past decade has been almost entirely a bull market. We’ve had corrections (market declines of 10% or more) along the way, however, nothing significant or prolonged. It’s inevitable that we’ll experience more corrections and even another recession (market declines of 20% or more) in our lifetimes. Having a Behavioral Financial Advisor™ there when it happens can help you avoid the most devastating mistake many investors make: succumbing to their emotions during market declines. In fact, the data suggests market declines are actually the best time to buy into the market with any sideline cash or cash flow!
The Bottom Line
Follow these steps to financial success in your 30’s and you’ll have the peace of mind to live a meaningful and happy life! The earlier you’re able to take control over your finances the sooner you’re able to put all your energy and attention into what you enjoy and value. If you and your family feel like it’s time to put a plan in place, schedule a free consultation today.