Making the smartest financial moves in your 30s is all about fine-tuning a few moves you started in your 20s, and being smart about your borrowing. Now that you are earning more, and perhaps are married –with kids aboard, or in the plans – finding the right balance between spending and saving for tomorrow is key.
- Get your retirement savings rate to at least 10%. Chances are if you have a retirement plan through work, it “auto-enrolled” you. That’s fine, but it comes with an unintended screw up: Plans typically auto-enroll new employees at a savings rate of 3% to 6% Both are way too low. Academics have run the numbers, and if you want to land at retirement in solid financial shape, you need to be saving a minimum of 10% to 15% a year.
Tip: Push yourself to get to 10% to 15% ASAP. You can always scale back your contribution rate if you find it’s just too much of a savings commitment. But what’s more likely is that once you have the money siphoned off from your paycheck each month you’ll be able to adjust your spending to your lower take-home pay.
- Don’t Become a Leakage Statistic. Leakage is the odd term the retirement industry has coined for when people cash out a 401(k) when they leave a job. Though cashing out is 100% legal, it is hands down one of the costliest moves you will ever make.
Money you have saved for retirement should stay saved for retirement. Let’s say you leave a job and have $25,000 saved in your 401(k). You decide to keep $15,000 invested in the account, but cash out the other $10,000. Maybe to cover some bills, or a vacation, and perhaps a wardrobe upgrade for your new job. Tempting? Sure. But way too costly. For starters, because you are under 59 ½ you will owe a 10% early withdrawal penalty. There will also be tax to pay: if you have a Roth 401(k) you will owe income tax on any earnings withdrawn. If you have a Traditional 401(k) you owe income tax on the entire withdrawal. That means you’re going to pocket a lot less than $10,000. Most important is the opportunity cost: $10,000 left growing for another 35 years will be worth more than $75,000 if it grows at an annualized 6%.
Tip: If you have at least $5,000 in a workplace retirement account you can leave it there for as long as you want. Or you can move the money to an account at a discount brokerage. The best way to do this is a move called an IRA Rollover. Every brokerage has plenty of advice on help to make this fairly easy. The key is to do a “direct” rollover: your old 401(k) sends the money directly to your new IRA account without any tax due.
- Slow Down Before Saving for the Little Ones College. Kids? Congrats. One of the hardest financial challenges you face right now is not slowing down on your retirement savings as you find yourself wanting (needing) to spend plenty on the kids. Fight the urge to start a college savings fund if it means you will not be able to keep up saving for retirement. That’s not selfish…it’s taking care of your kids. Fast forward 30 or 40 years: the rugrats will be grown adults, relieved that you have saved enough to live comfortably in retirement.
Tip: If you can’t get past the idea of having some savings for your kid’s college years, you might want to consider a 529 College Savings Plan, and ask the grandparents, aunts and uncles (and anyone else) who likes to give birthday and holiday gifts, to consider making contributions to the 529.
- Pay Your Health Care Costs with Tax-Free Dollars. As your family grows, so too can the trips to the doctor. If you enroll in a high deductible health plan (HDHP) you will be eligible to save money in a health savings account (HSA). That HSA can save a lot of money for young families. Money you contribute to an HSA is tax-deductible, and when you use it to pay for medical expenses, there is no tax. That effectively stretches your health care dollars by 20% to 30% or so, depending on your tax bracket. Check out the long list of “qualified” health care
- Borrow the Least You Need. The average monthly loan payment for a new car is more than $500. Even if you need a car, do you need one that expensive? Choose a car that requires a monthly payment of $350 and you’ve just freed up $150 a month for other financial goals. (see all of the above!)
Same goes for buying a home. A mortgage lender will tell you the maximum amount you can qualify for. That’s a dangerous tease. Your mortgage lender doesn’t care if you are saving for retirement, or if you want to retire early. Set your housing budget based on how much you can afford while not slowing down on all the other financial moves that will have you feeling great when you, gulp, turn 40.
Financial Decision Series
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.