When it comes to your finances, things start to change when you’re in your thirties. You’re no longer in your twenties, when retirement felt like something too far away to even imagine. But now is the time to get serious about building a strong financial future – one that will last for the rest of your life. If you’re a little behind, you don’t have to worry. It’s never too late to get started, and time is always on your side.
Here are some tips on how you can invest when you’re in your thirties.
A 401(k)/403(b) is a good starting point when it comes to saving for retirement. There are many reasons why, but here are some of the main ones:
Let’s assume that you make $50,000 a year and start to save when you’re 30 years old. Let’s also assume that you get 2% salary increases and a 6% average annual return. Saving 10% every year and collecting a 3% match will give you a net total of $1 million by the time you’re 67.
Once you have a workplace retirement account, you should take a look at its investment options. Many of them are inexpensive, but not all of them are. Some of them even have administrative fees. If your 401(k) plan is too expensive, you’re better off putting any extra contributions into an Individual Retirement Account (IRA).
With a 401(k), your contributions usually go in before taxes, so you’ll get taxed on any withdrawals. With a Roth IRA, the contributions go in after taxes. So, you won’t have to pay taxes on that money when you retire. The money also grows tax-free in a Roth IRA. But if you prefer to make pre-tax contributions, you can get a traditional IRA (which will give you a tax deduction now but will require you to pay taxes on any distributions when you retire). This kind of tax diversification is a reason why you should combine a 401(k) with a Roth IRA (if you meet the income eligibility requirements).
The downside of a Roth IRA is that it has a lower annual contribution limit of $6,000 in 2021 ($7,000 if you’re 50 or older). If you max it out, go back to your 401(k) until you reach its contribution limit or max out your savings budget.
Risk is the one reason why there’s so much emphasis put on investing while you’re young, because you have so much time until you reach retirement. When you’re young, you don’t have to worry as much about short-term volatility. This allows you to take on more risk, which could give you higher average returns over the long term. Even if you have thirty years to go before retirement, you’re still young enough to take on more risk by putting most of your long-term savings into equities.
Investing isn’t as risky if you diversify, so you shouldn’t put all your cash into the latest IPO. The key to diversification is based on two things:
Being older can help you on the first item, because your twenties and thirties aren’t likely to give you a lot of salary increases. With regard to the second item, funds like these track a certain index. One of them is the S&P 500, which includes 500 of the biggest companies in the United States.
An index fund pools your money with other investors to buy shares of any stocks in this group, and the performance of the fund will mirror the performance of the index (minus the fees you will have to pay to participate). Look for any funds with fees that are less than 0.50%. You might even be able to get it down to 0.10% in some cases. The cheaper the better!
The variety of stocks that are available in index funds will make you somewhat diversified, but if you want to take it even further, you can put together several funds that will give you access to a multitude of different asset classes. You can even invest in one or two that include small and medium-sized US companies. And because bond prices will often move in the opposite direction than stock prices, you can also invest in bond funds to help you balance the risk of your stock funds.
Retirement is a long-term goal that everyone thinks about, but it’s often treated as the only goal for investing. You can save and invest for other reasons as well. And when you’re in your thirties, those reasons will come up more often. Some of them can include but may not be limited to:
The trick is to prioritize your goals. Retirement should come first, but you can allocate money into achieving these other goals by saving a little more when you get a raise, putting away windfalls of cash, and taking advantage of changing expenses. If you pay off your student loans, you can put that extra money into a savings account instead of blowing it all on depreciating assets.
Everyone hates to think about it, but emergencies do happen. You could lose your job, your car could break down, or your dog may get sick. That’s why you need to have a savings account with some extra cash you can use in case there is an emergency. There’s no right solution for everyone, but having enough to pay your living expenses for the next six months is a reasonable starting point.
You will most likely make some big purchases in your thirties, which might include a home, a car, or even a big wedding. And it can add up pretty quickly. Because each of these goals is different in terms of their time horizons and the amount of money needed, you will have to set up separate strategies for each of these goals.
It may seem a little early to start investing when you’re in your thirties, as you’re still going to have thirty or so years of work ahead of you. However, the time value of money (TMV) and power of compounding interest would disagree! That’s why you should start making investment plans now instead of postponing them forever, and paying attention to fees is just as important as saving for retirement.
You need to be extremely cautious about the fees you pay. This includes any money you pay to your financial planner as well as any costs associated with the investments themselves. These payments may seem like nothing at first because they make up such a small percentage of your nest egg, but all of them will multiply over the next thirty years.
You need money to be an investor. But to get the money, you need to invest and not spend. It’s the most obvious piece of advice that’s given out by top business professionals. If you want to be a successful investor, you will have to do something that no one else wants you to do. You need to save some of your money instead of spending it.
Some people are used to saving money based on predicted future inflows. But because it depends on an income increase that hasn’t happened yet, this approach is a bit of a gamble. You should do your best to spend money based on your current financial situation. It will help you to avoid any major credit problems later on and to save any extra capital for investing.
If you want more information on how you can become a successful investor, be sure to get in touch with Trevor Shakiba at Shakiba Capital.
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