A few articles ago I started a series called life stage planning. We only got through the 20s before DOMA was repealed and sidetracked us. But now we are back to continue on through our financial lives providing steps everyone should take as they reach different ages.
Did your 20s pass you by without saving in your employer plan and Roth IRA? Still have credit card debt? No emergency fund? Then you absolutely have to start these things in your 30s. And for those 30-year-olds that did get these tasks completed, it’s time to build upon a strong foundation.
Thirty-somethings are progressing in their careers and making more money. You may buy a home in this decade of life, start a family or do both. The one thing that has to stop in your 30s is unbridled spending. It’s time to attack any credit card balances and stop wasting money on high interest rates. Go to powerpay.org to develop a payoff plan asap.
The next action item is your emergency fund. I would love it if a 20-something had 3-months of cash tucked away in a savings account. But that’s not realistic for most young adults. 30-something’s have more discipline and financial responsibility. An emergency fund needs to be 3-6 months of living expenses for those unexpected expenses that I guarantee will occur in everybody’s life. It can take a few years to get there, but setup a fixed monthly payment into a savings account to make this goal happen.
For retirement savings, the goal is to be contributing the maximum $17,500 to your employer 401(k) or 403(b) before you hit 40 years old. Most people can’t do this overnight. Take it in chunks and get there over several years.
Let’s say you save 10 percent of your income into the company plan. Increase that amount by 1 percent or 2 percent every year that you get a raise. You’ll be maxing out that 401(k) in no time at all.
Some 30-somethings may buy their first home. It’s tough in California with prices so high. But if that’s your goal, then go for it. I’d suggest keeping the down payment in a savings account or CDs so a downturn in the stock market won’t torpedo your house-buying goal. You’ll probably have to delay maxing out the 401(k) until you save up the down payment. That’s OK as long as you get the full employer match.
Once you have the down payment, don’t buy a home you can’t afford! Lenders are more than happy to qualify you for a loan that eats up all your available cash flow. Stick to a mortgage payment that doesn’t exceed 28 percent of your total income. One of the biggest financial mistakes Americans make is signing up for a huge mortgage payment. They struggle to pay it every month and have no money left over for any fun stuff. Remember, there is no rule that you must buy a home in your 30s. Wait until you’re ready.
Insurance is a must for 30-something’s. Get long-term disability insurance through your employer, or through a professional industry group if self-employed. Future earnings are the largest asset for young professionals. Protect it. Be sure to buy a 20-year term life insurance policy if you have kids. It’ll be pretty affordable in your 30s.
One last financial action item is to get estate planning documents. At a minimum, get an advanced healthcare directive and power of attorney for finances. If you have a partner or own a home, I’d strongly encourage you to also get a will and living trust. Everyone knows an estate planning attorney, so make that appointment. If you don’t, then just shoot me an email.
Steve Doster is a Certified Financial Planner™ professional providing commission-free financial advice for do-it-yourself investors. You can reach Steve at Doster Financial Planning by phone 619-688-1192 or email steve@dosterfinancialplanning.com. You can also follow Steve on Facebook, Linked In, Twitter, or blog to get more personal finance advice and tips.
