3. Maximize Your Retirement Accounts
There are so many options for retirement investing and choosing the right ones can feel daunting. In general, you should prioritize accounts with employer benefits and tax advantages before investing in others.
Maximize your retirement investments in this order:
- Invest the amount to get a full match on your company retirement plan. Employer contributions can vary widely so it’s important to ask your employer questions to fully understand your plan.
- Contribute to a Roth IRA or deductible traditional IRA, if you’re eligible, which grows tax-free. Roth IRAs give you major tax benefits later on in life because it’s funded with after-tax dollars, making it non-deductible. If you suspect you’ll pay low taxes in the future, a traditional IRA works well.
- Invest the maximum limit on your company 401(k). 401(k)s generally have high contribution limits. Even if you start small with your 401(k), you can work your way up to the highest limit. (you should do this before investing in the previous accounts if it’s a high-performing fund with low fees).
- Contribute to a traditional nondeductible IRA, which you make contributions to with pre-tax income and ultimately offers tax-deferred compound growth.
If you’ve accomplished the above and still have more available to invest, don’t forget about your Health Savings Account (HSA). This account offers a triple tax benefit: a tax deduction on the contribution, tax-free investment growth and tax-free withdrawals when used to pay for medical expenses.
4. Make the Most of Your Cash
Investing while covering expenses can be a delicate dance, especially at a stage in life where financial responsibilities seem to multiply. The trick is figuring out how much you can put away while still having enough liquid cash on hand to meet immediate needs.
Most people find that a cushion of between 25% and 50% of a month’s expenses is enough to cover fluctuations, but you may need more if you have an irregular income. This “cash buffer” belongs in your primary checking account so you can monitor it and see if you’re coming near to dipping below the amount.
Most financial planners also recommend an emergency savings account of three to six months of expenses. The specific amount should reflect your job security and potential volatility of your income. It’s best to keep an emergency fund in an online savings account separate from your primary checking so that you earn a higher rate of interest and make it slightly harder to tap the funds for non-emergency purposes.
Holding too much of your assets in cash, however, makes it difficult to stay ahead of inflation and generate sufficient returns to meet your retirement and other long-term goals. That is because cash historically provides poor long-term return. You’re also more tempted to react poorly to swings in the market. Build cash reserves and make sure they’re earning what they can for you, but funnel as much as possible into retirement and investments.
5. Plan for the Unexpected
Over the course of your life, you and your family are bound to face some unplanned—even unpleasant—moments. Some of these can be financially crippling if you’re unprepared.
It starts with proper insurance coverage. Nearly everyone with a spouse, partner, or child needs life insurance, and you are better off choosing term life insurance rather than a permanent life insurance policy. Term life insurance is a type of life insurance policy that covers a specified “term” of years. It’s typically much less expensive than permanent life insurance, which is an umbrella term for any life insurance policy that does not expire. You also need some form of disability insurance to protect you from an accident or illness that takes away your ability to work, because when you’re in your 30s, you’re far more likely to become disabled than pass away. Social Security Administration reports young workers have a 26.8% chance of being disabled for 12 months or longer before reaching retirement age. Just be sure to do your due diligence when researching disability insurance plans.
The final step in preparing for the unexpected is developing an estate plan to protect you, your family, and your stuff. You may wonder when to plan your estate and if it’s too early. You may also not want to think about what will happen if and when you’re gone, but you should. The estate planning process allows you to manage and preserve your assets while you’re alive and ensure the distribution of your assets is done to your wishes after death. If you have minor children, an estate plan is important beyond monetary reasons because it allows you to name the kids’ guardian in the event of your death—otherwise the decision is up to the state.
6. Get Assistance
Many financial advisors have tools and processes to help improve your investment and financial planning outcomes. Research from Vanguard estimates that financial advisors can add roughly 3% in relative return for an individual investor.
Choosing an advisor that provides comprehensive financial planning —not just investment advice—can get your entire financial house in order and keep it that way forever. These financial professionals can proactively assist in estate planning, tax projections, insurance analysis, entitlement strategies, and more.
Perhaps most important of all, hiring a professional frees you up to do the things you love most in life and alleviates the stress that can come from managing your financial matters.
The financial decisions you make in your 30s will impact you for the rest of your life. With these strategies, you can plan for a successful retirement long before you near the end of your career.
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