If you're in your 30s, it's time to start getting your financial plans in order. Your priorities are probably becoming clearer, and you can begin setting your financial objectives. Here are some guidelines to follow.
Prioritize Your Goals
People in their 30s are getting married and beginning to form objectives on how to use their money. A few examples are:
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- saving for a down payment on a house
- paying down debt, like student loans and credit cards
- setting up an emergency fund covering three to six months of expenses.
- buying a reliable car
- getting life insurance
- setting up a college savings account for the kids, maybe using a 529 plan
- opening traditional IRA and a Roth IRA
- putting aside funds to take a vacation
After clarifying your objectives, you can create a budget to cover your living expenses and the investments you need to make to reach your goals.
Consider also: 3 Things to Consider When Investing in 2022
Set Up a Budget
Many financial advisers suggest using the 50/30/20 rule to set your budget. It works like this:
Fixed expenses: You should budget 50 percent of your income after taxes to pay for essentials. This includes housing costs, food, car payments, utilities, healthcare and other minimum debt payments.
Discretionary wants: You can spend 30 percent of your income on things that are not essential. This would include dining out, vacations, tickets to events, the newest electronic device and coffees from Starbucks.
Savings: This means you should have 20 percent of your income left to invest. However, this figure varies for everyone and depends on their personal financial circumstances.
Investors in their 30s have different risk profiles than those in their 50s or 60s who are more interested in dividends.
How Much to Invest
Investing 20 percent of your income when you're in your 30s may seem impossible at first. You don't see any way you'll be able to save 20 percent with all the bills and expenses you have. Here's how to solve that problem.
Start smaller. Begin your savings plan by investing only 5 percent of your income. Then each year thereafter, increase the amount by 1 percent.
As the years go by, you'll likely have increased your income, and you can make adjustments to reduce expenses in your budget, such as opting for a cheaper car with lower payments or eating out less. When these things happen, you can probably notch up your savings by 2 percent per year.
If you follow this strategy, you could easily arrive at age 40 and comfortably invest a full 20 percent of your income. Now it's a habit you can stick to for the rest of your working life and build up a substantial retirement nest egg.
Consider also: Investing in Stocks for Beginners
What Investments to Make
Investors in their 30s have different risk profiles than those in their 50s or 60s who are more interested in dividends. When you're younger, you can afford to take more risks with your choice of investments. The investment term is longer and you have more time to recover from market downturns.
If your employer offers a 401(k), you should take advantage of it. The tax advantages and matching contributions by the employer will help you reach your goal of investing 20 percent of your income. In addition, you should also set up a traditional IRA and a Roth IRA to gain more tax advantages.
Unless you like active trading and researching stocks, a buy-and-hold strategy using mutual funds requires less effort and is better for the long term. If you don't want to choose between the different types of mutual funds, you can invest in index funds that follow a market indicator, like the Standard & Poor's 500 Index.
You can get started by setting up an account with a broker, like e-Trade, and buy funds issued by large providers such as Fidelity and Schwab.
Consider also: Which Comes First: Saving for a House or Retirement
- Investor.gov: Saving and Investing – A Roadmap To Your Financial Security Through Saving and Investing
- Investors.gov: Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing
- U.S. Securities and Exchange Commission: Ten Things to Consider Before You Make Investing Decisions
- Investor.gov: Index Funds
- Forbes: Investing By Age Series: Investing In Your 30s
- Inc: The 7 Investments You Should Be Making in Your 30s