Building Wealth in Your 30’s
Many individuals in their 20’s live without a care and for good reason. These early years of adulthood are usually focused on finishing our education, finding that first job, and figuring out our place among our peers and the rest of the world. Once we reach our 30’s, it becomes time to get serious about building personal wealth and to consider how we can maximize our prime earning years. This can encompass everything from paying down debt and building credit to ramping up retirement savings and planning for the future. Use these key points below to help you get on track with your finances and get a head start to build wealth in your younger years.
Evaluate Your Budget
Your income and expenses have likely changed since your early twenties or your college days due to career advancement, an increase in earnings, and changing tastes. For these reasons, and more, it makes sense to take another look at where your money is being spent or saved. If you’ve moved into a nicer apartment with a fully equipped kitchen, maximize your new space by cooking instead of eating out. Not only will your new place take a bite out of your budget, but so will money spent on groceries.
Naturally, increased living expenses mean that you may have to cut costs elsewhere. You may not be going out as often as you did in your early 20’s, or you might have cut back on shopping for clothes. You may have also finished paying off your student loans, freeing up a significant amount per month. In any case, you need to find ways to eliminate various line items to make room for some of the pricier necessities of adulthood.
And hopefully you’re making more money than you did when you were younger. With new spending power comes increased responsibility. Having additional disposable income not only means more wiggle room for discretionary spending, but also the ability to make meaningful contributions to your investments and savings.
Pay Down Debt and Monitor Your Credit
The sooner you pay off your debts, like student loans, the faster you can focus on saving money and investing in your future. Make sure you stick to any debt repayment plans you may have arranged and if you are able to, ramp up your repayment by increasing your contributions above the minimum payments. If you’re expecting an end-of-year or seasonal bonus, put it toward your student loans to pay down principal and decrease what you owe in interest.
If you have credit card debt weighing you down, it helps to make extra payments toward any balances with the highest interest rates first. Consider a balance transfer to another card with promotional offers such as zero-interest for a set period of time to help pause interest payments.
While you pay off your debt, be careful about your current credit card spending. Paying down debt while racking up more charges will do no good. Most credit card interest rates fall into the high teen to mid-20% range, therefore it makes the most sense to pay your bill in full each month. Credit usage is an important factor in your credit score, so try not to use more than 30% of your available credit limit.
Now that you’re older, your credit score and credit report is more important than ever, especially when you begin thinking about home ownership and obtaining a mortgage. You can receive one free credit report from each of the three credit bureaus annually, therefore you can keep an eye on your credit report for any mistakes, blemishes, or oversights. When you decide to buy a home and apply for a mortgage, your credit report will help you to get the best available rate.
Build Your Emergency Fund
In addition to savings for retirement, being more prepared for unexpected events should be a priority. Having a liquid emergency fund at your disposable will provide a cushion in the event of a sudden accident or job loss. You’ll want to keep at least three to six months of living expenses in the account. As your income increases, you should increase your contributions and the balance in this account.
Keep your emergency fund at an institution of your choice. It’s best to keep the funds in a savings account or money market account. You may notice that this money won’t grow as fast as your other investments or even a CD, but the advantage of being able to access this money if and when you need it is crucial.
Increase Retirement Contributions
No one stays young forever and its finally time to start thinking about the future if you haven’t already. Take a minute to think how much money you expect to live on each year in retirement, and how much you’ll need at the beginning of retirement to sustain your life after your working career, the reality can be startling. Starting to plan for your retirement now can help relieve some of the pressure that you would feel later in life if you do no planning.
To begin planning, try saving a fixed percentage of your income, say at least 15%. Now not everyone at this stage will have the means to set aside that much, but if you’re able to do so, consider increasing your 401(k) contribution if your employer offers it. At the very minimum, you should be taking full advantage of your employer’s 401(k) match if it is offered because this is free money! Every time you get a raise or additional compensation, you should increase your contributions. These contributions are made pre-tax, therefore you are not only saving for retirement but also lowering your taxable income. Depending on your marginal tax bracket and if your employer offers the option, consider making Roth 401(k) contributions.
Think about opening a Traditional IRA or a Roth IRA and contributing with a lump sum or through regular contributions. This will help bolster your retirement savings, and if you use a Traditional IRA, you will receive an additional tax deduction. Be mindful of the yearly IRA and 401(k) contributions limits and how they can change.
Being smart about your personal finances now will go a long way toward growing and maintaining your personal wealth in the future. Aside from the extra compound growth that your investments will experience if you start investing early, ensuring your financial security will make it easier to meet your longer-term goals as you get older. The stress of your first time home purchase, starting a family, and qualifying for loans can be reduced by being responsible in your early years. If you find it overwhelming to manage your investments and plan for the future, speak to your wealth advisor about how to get started. For more information on personal finance or just to chat, send me an email at [email protected]