3 Smart Money Moves in Your 30s | American Funds

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Creating a Financial Plan

AUGUST 2017

Building a Foundation:
3 Smart Money Moves in Your 30s

 

How do you plan for a financial future that involves people other than just yourself?

In your 30s, you're at “a critical financial crossroads,” says Deena Katz, professor of personal financial planning at Texas Tech University and co-chairman of Evensky & Katz/Foldes Financial Wealth Management. You may be established in your career and earning a bigger paycheck, but you’re likely facing major changes, too — like buying a home or starting a family.

Here are three things you can do in your 30s to address your financial planning priorities.

1. Establish a Foundation for Homeownership

Today’s typical first-time homebuyer is 32 years old with a household income of $72,000.

If you plan to purchase a home, start building on these principles:

  • Save for that all-important down payment. Ideally that amount should be somewhere around 20% of the eventual purchase price, though many lenders will accept less. Keep in mind that a larger down payment will mean a lower mortgage. Consider establishing a separate account to set aside savings for a home, and invest in it with a purchase date in mind.
  • Improve your credit score. Be diligent about paying your bills, and review your credit report for any errors. A strong credit score improves the chances of getting a lower interest rate on your home loan.
  • Understand the true cost of home ownership and how it will affect your budget. In addition to mortgage payments, consider recurring costs such as homeowners insurance, real estate taxes and home maintenance bills.
  • Keep your costs in check. Here’s a good rule of thumb: “Your monthly housing expenses should amount to no more than 30% of your monthly pay,” says Greg McBride, chief financial analyst at Bankrate.com.

2. Assess Your Insurance

For the first time, women in their 30s are having more children than those in their 20s. According to preliminary 2016 data recently reported by the Centers for Disease Control and Prevention, first-time mothers are older than they were as recently as 2014. If you’re among the growing number of people becoming first-time parents in their 30s, it’s important that you provide some financial protection for your family. Research the benefits offered by your employer. If insurance coverage is limited, consider purchasing individual policies to fill the gap.

  • Life insurance can replace your income if something happens to you, but how much do you need to help care for your loved ones if you are no longer able to provide support? Experts recommend seven to 10 times your annual salary.
  • Disability insurance can keep you afloat if you get sick or injured and are unable to work, says Scott Brewster, president of Brewster Financial Planning. The chances of becoming disabled are greater than you might think: More than 25% of 20-year-olds insured for disability benefits will become disabled before reaching retirement age, according to the Social Security Administration.

3. Expand on Your Investing

Most people should be contributing to a retirement account by now, whether it be a 401(k), IRA, or both. Factor in repayment of debt when considering how much to contribute to your retirement account. In fact, the mean retirement savings among Americans ages 32 to 37 is $31,644, but that amount more than doubles to $67,270 for those ages 38 to 43, according to the Economic Policy Institute. As your income rises, try to earmark a portion of that increase for savings and investing, and look beyond retirement accounts.

  • If you have children, you may want to contribute to a tax-advantaged 529 college savings plan.
  • Once you've maxed out your tax-advantaged accounts, consider investing in separate taxable accounts as well.
  • Reduce investment risk by spreading your investments among various types of assets. Many of your peers are doing just that. According to American Funds' recent "Wisdom of Experience" survey, 75% of Gen Xers said that building a diversified portfolio is an important part of creating a path toward a safe retirement. Purchasing mutual funds, which pool a variety of investments in one package, can help you diversify.

The Bottom Line

In your 30s your focus should be on establishing some financial stability and security for yourself and your family.

Avoid the trap of always seeking a bigger house or an expanded lifestyle,” says Ken Burdick, senior product specialist at American Funds. “Instead, make responsible choices for your future.” 

 

What's next: 3 Smart Money Moves in Your 40s


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