5 Essential Money Tips for Generation X

Financial Planning, Investing, Retirement Planning
5 Essential Money Tips for Generation X

It’s not your imagination, Generation X. The financial pressure cooker heats up with every candle added to your birthday cake.

Between saving for retirement, paying for the kids’ education, juggling loan payments and budgeting for all the costs that come with aging cars, homes and parents, the demands on our paychecks can seem perilously close to turning into a four-alarm situation.

Gen Xers — those of us in our mid- to late 30s through our early 50s — can successfully juggle competing priorities and strike some measure of life/money balance by making these essential money moves.

1. Shore up your financial foundation

Regardless of your age — talking to you, baby boomers, millennials, Gen Y and the future Gen Robot Overlords — the core rules of smart financial management apply:

  • Pay yourself first by skimming retirement savings off the top of your paycheck before whipping out the shopping list
  • Build an emergency fund big enough to cover the now familiar financial gotchas of life
  • Have a plan to pay off any lingering student loans and high-interest debt

Having your financial house in order becomes even more important as you hit the milestones that many Gen Xers are encountering today — coupling up, having kids, acquiring property. It’s especially crucial when others depend on your paycheck.

2. Realign your priorities with reality

Making room for all of your financial priorities will always be a challenge, but at this stage you might face some especially tough choices. One of the biggest is the saving for college tuition versus saving for retirement conundrum.

Here, you have to look out for No. 1. Your kids may be the apples of your eyes, but if money is tight, your future financial stability should come first. You can’t assume they’ll return the favor and support you in your old age.

Although the ubiquitous college savings vehicle, a 529 plan, can help you save on taxes, it’s pretty inflexible if Junior’s gap year turns into a gap decade or you need to access that money early to cover other expenses. You can use that money only for qualified education expenses or you’ll have to pay a 10% penalty and income taxes on withdrawals.

One way to cover both retirement and college savings is to use a Roth individual retirement account. (Find out how and where to open a Roth IRA.) Withdrawals of contributions to a Roth are allowed at any time and for any reason without taxes or penalties.

When college comes around, you can reassess your financial situation to see if you’re in a better position to pick up some of the tuition tab. Or maybe your progeny is flooded with scholarships or the grandparents really come through; if you end up not needing to tap into the Roth, all the money will be there for your future.

3. Embrace your age

The late 40s and into the 50s typically are peak earning years. You know what that means? They can also be your peak savings years.

Even the IRS wants to help you. The year you turn 50 you become eligible to save even more in tax-advantaged retirement accounts: an additional $1,000 in an IRA on top of the $5,500 contribution limit for those under 50 and an extra $6,000 on top of the standard $18,000 limit in an employer-sponsored retirement plan. If maxing out both options is out of reach, here’s how to decide between investing in your company 401(k) plan versus an IRA.

4. Don’t back away from risk

The closer you get to retirement age, the less exposure you should have to stocks. But don’t overdo it. Acting older than your age by playing it too safe with your investment mix puts you at risk of severely dampening your long-term portfolio returns.

People in their early 40s may have 20 to 30 years of investing ahead of them before retirement. Based on the current investment mix in a Vanguard target-date retirement fund aimed at investors this age, having 87% of savings in stock funds might be appropriate at this stage.

Even after retirement, investors should still hold stocks in their portfolio. Vanguard’s target-date fund for people in their late 60s or early 70s allocates 30% of its mix to stocks.

5. Rethink retirement

Growing tired of the old grind? (Note to editors: Here I’m clearly addressing people whose souls do not soar with nonstop joy during the hours of 9 to 5 like mine.) That’s not a surprise. Gen X has been through some stuff — enough to know that money isn’t an end-all and be-all but merely a tool to enhance life.

With a few decades of adulthood behind us, it’s a good time to step back and really think about the future. Maybe you want to spend more time with your children now while they’re young. That could mean cutting your hours and taking mini sabbaticals before the nest empties. Perhaps you want to pursue a new line of work that will require time and tuition for training.

Whatever the case, developing a road map for your future starts with calculating how much your current and projected income and retirement savings will provide. (This retirement calculator provides a monthly retirement income estimate, suggestions for additional steps to take and the ability to play with some “what if” scenarios.)

Our 20s — and 30s and 40s, for some Gen Xers — may be behind us, but there are plenty of years ahead for compound interest, paired with subtle shifts in how we spend, save and invest, to work its transformative magic.

This article was written by NerdWallet and was originally published by Forbes.