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Once you reach your thirties, it is time to get serious about your finances. Here are the 10 financial commandments to consider at this stage of life:
1. Max out your 401(k)
A 401(k) is terrific workplace benefit, especially if you get a generous matching contribution from your employer. You should contribute at least as much as is needed to fully take advantage of your company’s match. I encourage clients to contribute an additional 1% to 2% over the match. (Your maximum yearly contribution amount is $17,500.) You won’t miss it from your paycheck, but it will make a difference in 30 years when it’s time to retire.
2. Start investing outside of your 401(k)
If you are already maxing out contributions to your 401(k), it is time to start investing outside of your workplace plan. If you can contribute to a Roth IRA, do so until you no longer qualify.
It is also important to start thinking about diversifying the types of your investment accounts. Most people have the bulk of their investments in tax-deferred retirement accounts. It can also make sense to have some investments in taxable accounts, allowing you the freedom to access your investments should you want to make a larger purchase, such as buying a house.
3. Get your asset allocation right
Compound interest is a powerful thing. To reap the benefits from compounding returns, you need to have the correct mix of investments, also known as asset allocation. If you are invested too conservatively, your investments may not give you the long-term results you are looking to achieve. Conversely, if too many of your investments are risky, the volatility may keep you up at night.
Having a proper asset allocation will also ensure your portfolio is diversified. Diversification is the only free lunch in investing!
4. Don’t over-invest in your company
Companies often offer an employee stock-purchase plan that allows you to purchase company stock at a discount, with money taken out of your paycheck. Or you may hold stock because you received options or restricted stock as part of your compensation. Or maybe you just think your company has a bright future and want to invest in it.
There is no perfect formula to figure out how much of your net worth you should hold in your company’s stock. Since you rely on the company for your salary, health insurance and other benefits, you already have a big financial commitment with them. It is great to have skin in the game beyond just working at your company. But talking with a financial planner or investment advisor can help to determine what the right amount is for your situation.
5. Start financial planning
Financial planning in your 30s is important because you can start to frame your long-term financial goals and identify what you’ll need to do to achieve them. Many of the projections will change and be refined as you progress in life, but the sooner you have a plan in place, the better.
6. Save for your kid’s college costs
Start saving for college ASAP! There’s an easy way to do this: 529 plans can get you started with small dollar amounts. College costs are soaring, at more than double the rate of inflation. One way to cope is to start early and set an aggressive investment allocation.
7. Purchase disability insurance and life insurance
I have two types of friends in their 30s: the ones who realize they are not invincible, and those who have not figured it out yet. It’s important that you protect yourself and your family from the unexpected. Look into a term life policy for both you and your spouse. And while disability insurance is often an afterthought, you are more likely to file a claim on a disability policy than a life insurance policy. Make sure you have enough disability coverage through your employer. Otherwise, look to an outside provider.
8. Have an emergency fund
An emergency fund is one of the building blocks of financial planning. If you don’t have money set aside, the unexpected can create havoc in your financial life. Your goal should be to have between three and six months’ expenses in short-term savings.
9. Pay off your debt
Getting into debt is easy—paying it off is not. Create a plan to pay off credit cards, student loans and auto loans, leaving you with only your mortgage. You’ll then have more of a cash flow to invest for retirement, save for your children’s college fund and meet other financial goals.
10. Start planning your estate
Many people put off creating a will or a trust because they think they have plenty of time to get around to it. You can get away with this while you are young and single, but no more once you reach your 30s and have a family. If you have children, you want to make sure they are secure after you’ve died. Estate planning can ensure that happens. And having a completed estate plan will avert any family conflicts over your estate. Meet with an estate-planning attorney to discuss the best strategy for you and your family.