Reaching your 30s is like being at the crossroads of life – when you think more seriously about important goals in life, whether personal or financial. While some decisions can be postponed, such as career moves, getting married or having children, some vital financial decisions cannot be delayed without long-term adverse effects.
Certain financial decisions can produce slow but big impact on your future life. To secure your financial well-being and to achieve your objectives, such decisions must be made at the proper time. Consider these seven principal financial guidelines when you are in your 30s.
1. Set up an emergency fund
Anyone who receives a paycheck must set up an emergency fund, in case you stopped receiving one and have to pay your bills. What if your car suddenly broke down? Do you have the extra money for repairs? A contingency fund will allow you to go on with your life as usual without getting into debt or getting disoriented.
You can begin by putting away enough money for three months’ worth of your personal expenses and slowly increase your emergency fund to incorporate six months’ worth of your expenses. No matter how small it might be, if you have such limited budget, build that emergency fund. For instance, set aside an hour’s worth of your salary per workday after you receive your weekly check and work up to two hours’ worth of wages per workday whenever you can afford it. In case that is not viable, set aside $50 each week ($200 per month) and build it up to $75 weekly or more when you are capable. Avail of automatic transfers from your check to your savings account to make regular deposits into your fund.
2. Create a payment strategy
Once you reach 30, resolve to establish a sound foundation for a secure future and begin by paying off your debt. There are good and there are bad debts. School loans and home mortgages are good and necessary at times; however, high-interest credit-card debts or personal debts can cause so many problems. Deal with both kinds with dispatch.
Your best approach is to pay off debts with the highest interest rate before others. Hence, prioritizing a credit-card debt that charges 22% interest rate would save you more of your money’s value than clearing a home mortgage loan that charges only 4%. Seek the assistance of a debt management expert to determine the most efficient way to resolve your debt issues.
3. Begin or Keep maxing out your 401(k)
It is far better to max out your 401(k) or other retirement plans than your credit cards. Your age is the ideal time.
Contribute as much money as you can afford to your employer-sponsored retirement plan. In case you still cannot pay the maximum contribution limit, at least contribute enough to benefit your employer’s matching contribution, if you are allowed. That is free money you should use. In case your company offers no retirement plan, acquire a regular IRA or Roth IRA account. An IRA allows you to contribute a maximum of $5,500 in a year.
For self-employed individuals who cannot avail of a employer-sponsored retirement package, set up your own. There are common alternatives you can choose from, such as the self-directed Solo 401(k) for owner-exclusive enterprises or the self-employed, SEP IRA or SIMPLE IRA plan. For such plans, here are the yearly contribution limits:
Solo 401(k): Maximum of $53,000 for 2016, including catch-up contributions of $6,000 for individuals above 50 years old.
SEP IRA: Maximum of $53,000, or 25% of compensation.
SIMPLE IRA: Maximum of $12,500, including catch-up contributions of $3,000 for individuals above 50, if allowed.
4. Go investing now
Being in your 30s is your best asset; investing now is also to your advantage. Take the case of two actual investors. Steve began investing $1,000 monthly at 30 until he reached 40. Although he stopped investing, he did not take out his investment and left it to grow until he retired at 60. Bob, at 40, began investing $1,000 month until he reached 60.
At a 5% average rate-of-return compounded yearly, Steve earned $154,992 after 10 years. Because he kept his money invested, he eventually earned $411,240 at 60. On the other hand, Bob got $407,460 under similar investment terms. The power of compounded interest worked to Steve’s advantage. You see, compound interest allows your return to be augmented to your principal every year, making your money grow more rapidly, unlike simple interest rate which uses the original principal invested to produce a constant yearly return.
For novice investors who have only limited grasp of the investment world, opt for passive investing, applying approaches that utilize the general fluctuations of the market instead of projecting the sectors or assets which will perform well. You can do this by investing in mutual funds or exchange-traded funds which are tied to a broad-market index. For individuals in their 30s, starting with ETFs is the most advisable due to their affordable fees and transaction costs.
5. Determine the proper investment method for you
In case you have not encountered asset allocation, now is the time to learn it. Asset allocation involves choosing the appropriate distribution of various investment kinds (or asset classes) to suit your portfolio with your risk tolerance level, target investment schedule and financial objectives. Certain investments, such as stocks, involve greater risk although they provide bigger returns compared to such instruments as bonds. Hence, for a highly aggressive investment approach, build a portfolio that has more stock exposure; and for a less risky approach, gear up to more bond exposure.
You future wealth will depend greatly on your asset allocation. A very conservative portfolio might provide a nest egg that is insufficient, while a risky allocation could bring bigger returns; but it might cause you to worry when the market goes haywire. Your best option is to ask the advice of a financial professional on which investment approach suits your needs, objectives and risk capacity.
6. Opt for diversified investments
One vital part of creating a portfolio is diversification of your investments. Thus, if you have stock investments, diversify your equity holdings by investing stocks from firms that are different in sizes (whether large, medium and small capitalization stocks), classifications (whether value or growth stocks) and locations in the world. With a diverse assortment of investments in hand, you can distribute your risk and mitigate the effects of volatility.
Likewise, consider other investment choices that will provide greater portfolio diversification to withstand stock market volatility. The objective is to augment investments that have no tendency to move along the direction of the stock market and brings significant long-term returns. Alternative investments that are commonly popular among investors are real estate, precious metals, private stock, life settlements and private debt placement. Nevertheless, be reminded that alternative investments involve serious study; so do the homework, find how these investments perform, before jumping in.
7. Saving for college education
Start saving for college costs when your first child arrives. Although that may seem too early to start, with college education getting more expensive, you protect yourself and your family from many future problems the earlier you begin saving and investing for this important expense. A tax-friendly plan, such as a 529 college savings plan, can produce the required money to support your child’s expenses in college. Take the long-term perspective; consider implementing a more aggressive investment approach for the plan.
Visualize the far future
“Setting objectives is the initial step in making the invisible visible,” says Tony Robbins, entrepreneur, author and inspirational speaker. This is especially true for financial planning. Creating a financial plan requires seeing far into the vast horizon — that is, you’re the long--term personal and financial objectives — to discover the most suitable strategy to pursue in the present.
Although at time you do not feel you have control over your financial life, you actually do more than you think. The secret is in making well-informed decisions and acting promptly in order to prepare the way to financial stability and to reach your aspirations.