24 Apr Financial Planning Goals through the Decades: Your Thirties
Key Planning Decisions for your 30’s
- To buy or to rent?
At this stage in your life, you are poised to make major decisions that have significant long-term impacts. As you think about a career, home, and family, you want to weigh all your options carefully before making a decision that will alter the course of your life. One of the most key questions in this category of important life decisions is whether you will buy or rent a home. Both of these options have pros and cons, and are therefore hard to choose between. Renting has the advantages of low cost and mobility. Renting an apartment requires far less money up front than buying a house and monthly rent will likely be less than mortgage payments. In addition, a one-year lease on an apartment leaves you a lot more flexible than someone who just put a down payment on a house. On the other hand, a house is an investment that you can improve over time. A house can be sold for a profit in the future or passed down to your children; whereas no matter how much money you put into an apartment, in the end you own nothing. In the end, this decision depends on your particular life situation. If you have found a job you want to keep in a place you want to stay and you have the capital for a down payment, a house may be a great investment that will improve your quality of life as well as your portfolio. However, if you are not ready to settle down into a place or career, or need cheap housing in order to free up money for other uses, renting an apartment is the smarter choice.
- Talk to your significant other about money .
As a person in your 30s, it is likely that you are in a long-term relationship or hope to be at some point in the future. Often in committed relationships, partners choose to combine their finances and share responsibility for expenses and debt. Unfortunately, money is complicated and is made even more so when two people are acting as one financial unit. As a result, money is often cited as a major cause of break ups and divorces. This does not have to be your story. Learn to communicate with your partner about money and turn your finances into a collaboration of which you may both be proud. The most common advice for couples considering combining finances is to first have a serious discussion about money. The first things you need to talk about with your partner are your respective philosophies surrounding money, spending, saving, retirement, etc. It is common for one partner to have different consumption habits than the other, causing conflict. If you can address and settle these differences up front, you can avoid future arguments. For instance, if one partner is freer with his/her spending than the other, he/she should consider maintaining a separate checking account with money for his/ her spending. Next you will want to communicate with your partner about life goals that will impact finances. Come to agreements about savings and retirement goals so that you are on the same page with your partner in terms of putting money away for the future. Furthermore, if you and/or your partner have other life goals, such as graduate school or travel that will impact your finances, you need to discuss how you will set aside enough money to achieve them. Talk about career goals. If one partner makes significantly more money than the other or one partner chooses not to work, how will this affect how much spending money each person gets? Do you hope to have children? How many? Do you want to send them to college? What are your expectations in terms of lifestyle? Are you comfortable living below your means in order to increase savings and investment? You also must determine how you and your partner will compartmentalize your money. Consider a joint account to pay for housing, bills, taxes, education, retirement contributions, etc. and separate accounts for personal spending. In this way, you can avoid arguments related to one partner spending the other’s money inappropriately. Another essential part of this discussion is an assessment of your current finances as a couple. Review your income, expenses and the balance as well as your assets, liabilities, and the balance. Also review your credit scores and credit reports. Looking at this information ensures that each of your financial profiles, debt and all, are transparent. Once you have information about your income, expenses and debt you can begin creating a collaborative budget. Finally, understand that communication around finances must be ongoing. A review of income, expenses, debt, and net worth should be an annual tradition to keep you up to date on your financial situation. Similarly, each partner needs communicate with the other about financial actions. Talk to each other about investments. Let your partner know if you are reallocating parts of your portfolio, selling off investments or making new ones. Discuss your bills and ways to reduce them. Consult with your partner before making a large purchase. These practices will get you in the habit of communicating with your partner about money, which will prevent miscommunications, deceptions and mistakes that can lead to conflict. That said; remember to be forgiving of your partner. Mistakes happen and it is likely that one or both of you will make a serious financial error at some point. In these instances, remember your commitment to communication and collaboration and work through your difficulties together.
- Max out employee benefits
When searching for a job, an important consideration is what kind of benefits package your potential employer is offering. Even more than a good starting salary, substantial health and retirement benefits will have a large impact on your financial well being in the future. In fact, when choosing between two opportunities, it may be better to go with the job with a lower salary, if it is offset by a stronger benefits package. Learning about your employee benefits is important, because your employer’s 401(k) plan will be one of the most powerful tools in planning and funding your retirement. First, you need to understand exactly what benefits you are receiving or are entitled to. For instance, according to the Employee Benefit Research Institute, almost two-thirds of wage earners between the ages of 35 and 54 believe their employee benefits include a defined-benefit pension in retirement. In reality, only about 30 percent of the current work force is currently enrolled in such a program. Similarly, only 33% of large companies offer retiree health benefits, according to Hewitt Associates. Getting to know your benefits package allows you to take stock of how you are covered through your job, and where you need to fill in the gaps. Once you know exactly what your employee benefits are, you need to make sure you are enrolled in and contributing to all relevant programs. Too many young people are leaving their company 401(k) accounts unfunded, missing out on all the benefits of starting retirement savings early, such as compounding interest. Find out if your employer offers matching contributions to 401(k) accounts. Employer matching is essentially the ideal investment opportunity, because up to a certain dollar amount, your invested assets can be enhanced. Sign up for automatic contributions up to the maximum amount that your company will match. Try to get as close to the annual contributions cap (currently $18,000 in 2017) each year, the future returns are worth it.
- Save for college
If you have, or are planning to have kids, you are going to want to send them to college. I hate to break it to you, but it is going to be expensive. According to the College Board, for the 2016-17 school year, on the average a public university costs $20,090 for in state residents and $35,370. for out of state residents, while a private college costs $45,370. With inflation and rising tuition fees, these expenses will only increase. The good news is you can afford it if you start saving early. Just like saving for retirement, the key to successful saving for college is time. Starting to save now allows for your money to accrue interest, and your investments to yield returns. Simply putting money away into a savings account will not achieve your goal. You need to put your money in an account that will allow you to invest somewhat aggressively. One option available is what is called a 529 plan. 529 plans are attractive, because they allow you to invest in the stock market and contributions grow tax-deferred until they are used to pay for college. By starting early, you can grow your money through investment over many years while reducing the impact of market ups and downs.
- Diversify your portfolio
When creating an investment plan, you need to consider your goals as well as your risk tolerance. The distribution of your assets amongst the three basic investment types: stocks, bonds, and stable value or money market investments, will have a significant impact on both the returns on your money and your vulnerability to market instability. Stocks have historically produced higher returns than bonds over the long run, though with greater risk. All investing involves risk, including possible loss of principal. As a person in your 30’s, you can handle more risk in your portfolio than someone further along in life, because you have the time necessary for investments with higher risk but higher potential to pay off despite temporary ups and downs in the markets. Securing the services of a financial advisor is valuable when building your portfolio and managing risk, because an advisor can tailor your portfolio to your unique goals and risk tolerance.
- Live below your means
As you begin to move up the ranks in a company, or finally land that dream job, you may find that you have more money at your disposal than you ever have before. Many people in this position use the extra income to enjoy an elevated lifestyle. However, this kind of indulgence is a detriment to your future financial security. Instead, make it a goal to live below your means. By buying a smaller home or a more economic car, you free up money for retirement savings, college savings, and unforeseen circumstances. You also will feel better if you are saving rather than stretching your money. When you get a raise, raise your retirement contributions. When you get a bonus, put it in your Roth IRA. In this way, you will be able to support your current lifestyle while also taking steps to ensure your future lifestyle.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.