I'm in my 30's: What are the Best Ways to Plan, Invest and Build Wealth for my Future?
AI's response in regular print | Beverly Hills, CFP®, Joe O'Boyle's in italics
“I'm in my 30's, what are the best ways for me to plan, invest and build wealth for my future?”
Stepping into your 30’s often comes with increased responsibilities, including the possibility of raising a family. This new chapter requires an evolution in your financial planning and investing strategies to accommodate changing goals and needs. Remember that starting to plan your financial future at a young age is a great way to take advantage of your biggest asset as an investor… time. Here are some steps to consider on your journey to building wealth.
Update your Written Financial Plan & Revisit Your Goals: How has the vision that you have for your life changed since your 20’s? Start by writing down your updated short-term and long-term financial objectives. In order to actually make the choice to save and invest for you future, you have to start with why you’re doing it. Be specific about what you want and what’s most important to you. Your goals in your 30’s may include starting a family —many couples in their 30’s factor in hospital and possible fertility costs such as egg freezing, IVF, or surrogacy. Your goals may also include saving for a house purchase or home renovation, planning for world travel or taking a sabbatical from work. Perhaps you’re considering leaving your employer to start your own business while you continue to work towards financial independence and the ability to retire early. In order to avoid wasteful, impulsive spending in your thirties—where your spending doesn’t provide you with value—you will want to create (or update) your written financial plan for achieving your objectives. When delaying gratification and investing for the long-term, start with your “why”.
Live Below Your Means & Automate Your Savings: Update your family budget that you call “my spending” or “our family spending”. Track your take-home income (the money that comes into your individual and/or joint checking account each month) and your spending (the money that goes out of your individual and/or joint checking account each month) so you are aware of exactly where your money is going. Remember that “my spending” or “our family spending” represent your choices with money, so you are in control. Differentiate between your needs and wants. Taking responsibility and ownership over your money choices in your 30’s will reinforce good habits for managing your finances effectively over your lifetime.
Be sure to pay yourself first by automating your savings plan so that you are saving and investing first and spending second. This way, you cultivate the crucial habit of “living below your means” which is another way of saying “spending less than you make”. By spending less money than you take home each month as a household, it allows you to save and invest towards your specific family goals. Living below your means is perhaps the most important financial habit and key indicator of a successful financial plan.
In my 20 years of financial planning experience, I’ve found that most 30-somethings can’t answer these 3 simple questions:
—Exactly how much am I taking home every month?
—How much am I spending each month? (pro tip: use your last 3 month spending average and then compare that against your last 12 month average monthly spending figure)
—How much am I intentionally saving and investing each month towards my goals? (pro tip: make a commitment to yourself and your family by writing down your goals, sharing them with your partner, and tracking your progress)Build an Emergency Fund: Your emergency savings fund serves as a safety net for life’s unexpected expenses or loss of income. In your 30’s, many financial planners recommend expanding your emergency reserves so that you are saving 6 to 12 months' worth of living expenses in a conservative high-yield savings account or money market fund. This target amount should be sufficient to cover all of your necessities such as rent or your mortgage, insurance and property tax payments, groceries, utilities, transportation costs, childcare and health care expenses.
Many of our more successful clients actually aim to save up 12 to 24 months worth of emergency reserves. They set up an automatic monthly savings plan towards building up their emergency fund as a top financial planning priority for the family. For example, if you spend $8,000 per month on necessities, your emergency savings goal may be $100,000. Start today by saving a small amount from each paycheck and build up your emergency reserves over time. Ideally, the interest you are earning in your emergency savings fund is growing faster than inflation, net of taxes, otherwise you are losing purchasing power over time.Pay Off High-Interest Debt: High-interest debt, such as credit card debt with 20%+ interest rates, significantly hinders your ability to save and invest and is a toxic, destructive force against achieving your financial goals. Prioritize being debt-free and attack your credit card debt. Remember to use credit cards only when you’re sure that you can pay the balance off in full each month. If you’re currently carrying credit card debt (beyond what you pay off each month in full), STOP using your credit card and pay them off aggressively.
After you have paid off your high interest credit card debt, start attacking any remaining student loan debt. Break up your various student loans into tranches (different buckets) and work on aggressively paying off one tranche at a time. Paying off each student loan tranche creates positive momentum and helps keep you focused and motivated towards paying off the next tranche until you are ultimately debt-free!Increase Contributions to Tax-Advantaged Retirement Accounts: The earlier you start investing, the more time your money has to potentially grow and compound.
We typically recommend our clients in their 30’s contribute to an after-tax Roth 401(k) through their employer, an after-tax Roth IRA, and a pre-tax Health Savings Account (HSA). This strategy offers up a tax-free planning trifecta because your money is potentially growing tax-free across all 3 tax-advantaged retirement account types. For a married couple in their 30’s, because you may each contribute to all 3 account types, you can have a total of 6 accounts. For example, you may each have your own Roth 401(k) through work, your own Roth IRA outside of work as well your own Health Savings Accounts (even when you have qualifying family health insurance coverage through one spouse).
—Roth 401(k): If offered by your employer, you may contribute up to an after-tax maximum of $22,500 via payroll deductions to your Roth 401(k) plan during the 2023 calendar year. At minimum, you will want to contribute enough to receive your full company 401(k) matching contribution (if applicable), otherwise you are effectively leaving free money on the table. Funds in your Roth 401(k) may grow 100% tax-free for retirement. Most planners recommend contributing at least 10% of your pay to your Roth 401(k) and increasing your contribution percentage each year. For a married couple in their 30’s, each of you may potentially contribute up to $22,500 to your respective Roth 401(k) for a maximum family contribution of $45,000.—Roth IRA: If you are single, with a modified adjusted gross income of less than $138,000, you may contribute up to an after-tax maximum of $6,500 to your Roth IRA for the 2023 tax year by the April 15, 2024 deadline. If you are married, with a combined modified adjusted gross income of less $228,000, you may each contribute the maximum. Funds in your Roth IRA may grow 100% tax-free for retirement. For a married couple in their 30’s, each of you may potentially contribute up to $6,500 to your respective Roth IRA for a maximum family contribution of $13,000.
—Health Savings Account (HSA): If you have a qualifying High-Deductible Health Plan (HDHP), you may be eligible to contribute up to a pre-tax maximum of $3,850 to a Health Savings Account (HSA) for the 2023 tax year by the April 15, 2024 deadline. Contributions are made pre-tax, grow tax-free, and can be withdrawn tax-free for qualified medical expenses, making them triple tax advantaged. Because funds in your HSA may grow 100% tax-free to cover medical expenses in retirement, our clients intentionally choose not to use HSA funds for today’s medical expenses and instead treat their HSA as a long-term retirement account (like their Roth IRA) and invest the funds accordingly. The HSA contribution limits for 2023 are $3,850 for self-only coverage and $7,750 for family coverage.
After making contributions to your Roth 401(k), Roth IRA and HSA, your deposits will typically be held in a money market fund (cash). To help your money grow over time, you will need to take an additional step to actually invest these funds and not leave them sitting in cash. Famed investor, Warren Buffett, recommends that investors in their 30’s select a low cost, stock index fund (stock mutual fund) such as the S&P 500 stock index as a way to invest in a broadly diversified mix of businesses to grow your wealth over the long-term. For context, a one time $1,000 investment in the S&P 500 stock index made in 1957 has grown to over $659,000 today (at the time of this writing) and averaged a 10.25% annual rate of return. This illustrates the incredibly powerful combination of time and compound returns.Taxable Brokerage Account: A taxable brokerage account can give you more flexibility than retirement accounts because you can withdraw funds at any time without penalty. Consequently, liquid (taxable) brokerage accounts are excellent for short and mid-term goals that aren't retirement related, such as saving for a down payment on a home or investment property, saving up to start your own business, saving up to travel or live abroad, or saving up to help care for aging parents.
In your brokerage account, based on your risk tolerance and time horizon, you may choose to invest in different mutual funds or ETF’s that are aligned with each of your specific goals. For example, you may choose to invest in more conservative investments such as short-term Treasuries (T-Bills) or municipal bond funds for your shorter term goals, while you may choose to invest in a balanced fund (mix of stocks and bonds that may experience more ups and downs with the markets) for your mid range planning objectives.Save for Your Children's Education: If you have kids, consider opening a 529 college savings plan to give your children a tax advantaged head start in paying for college. The parent, who is typically the owner of the 529 college savings plan, maintains control over the funds and chooses from a menu of different mutual fund investment options. Contributions to a 529 plan are made as after-tax contributions (there may be a state tax deduction depending on your state) while the money in the plan grows tax-free. Withdrawals from 529 plans used for qualified educational expenses—such as room/board/tuition/books/computer—are also completely tax-free which make 529 plans a fantastic vehicle for saving for college. Parents may contribute up to $17,000 each ($34,000 combined) during the 2023 calendar year to each child’s 529 plan. Additionally, family and friends can also make contributions to a 529 plan.
Insurance: Protect yourself from financial risks by making sure that you have the appropriate amount of insurance coverage. This may include health insurance, life insurance, disability insurance, car insurance, and homeowners or renters insurance.
For families, term life insurance is the most straightforward type of life insurance used to protect children. You pay premiums for a specific term (like 10, 20, or 30 years), and if you die within that term, your beneficiaries receive the death benefit income tax-free. Term life insurance is generally the most affordable type of life insurance and can provide substantial coverage for a lower premium cost.
When evaluating an appropriate amount of life insurance coverage, most married couples want to be able to pay off a remaining mortgage balance, fully fund a child’s college education, while having enough left over so that a surviving parent would not have to work for a period of time (to spend more time with a child who has just lost a parent). Depending on your financial circumstances and the cost of the term life insurance (which is based on the health rating you get when applying), it’s common for a married couple in their 30’s to apply for $1 million plus in 20-year term life insurance coverage.Estate Planning: You may want to work with a local estate planning attorney who can help you to create your estate plan. Depending on your state and your financial circumstances, this may include setting up a living trust, drafting your will(s), designating guardians for your children and establishing the appropriate powers of attorney.
When speaking with an estate planning attorney, here are 4 initial questions you may consider:Who will be your successor trustee(s)?
If you have a trust as part of your estate plan, should you become incapacitated or after you pass away, a successor trustee is someone you designate to step in and manage the trust's assets in your stead. Your successor trustee(s) will ensure that the assets in the trust are distributed or managed according to your instructions.Who will be your guardianship nominations that you make in your will(s)?
If you have minor children (or dependents), this question pertains to who you'd like to take care of them in the event of your (and your spouse's, if applicable) passing away. This person will be legally responsible for your children’s well-being. Without a nomination, the court will decide who will be the guardian for your children, which might not align with your personal preferences.Will you have healthcare powers of attorney set up? If you and your spouse are both primary for each other, who will be your back-ups?
A healthcare power of attorney is a legal document that gives someone else the authority to make medical decisions for you if you're unable to do so (e.g., if you're in a coma or otherwise incapacitated). Typically, spouses will list each other as their primary agents, but what if both are incapacitated at the same time? This is why you need to choose a back-up, someone you trust to make decisions on your behalf should the primary person be unable to.If both parents were to pass away prematurely, will you specify ages of distribution for your kids?
Rather than receiving a full inheritance as a lump sum at age 18 (when a young adult may be more likely to squander the funds), instead, many parents use a trust to stagger the inheritance. For assets held in a living trust, the trust may state that a child will receive one-third of their inheritance at age 25, another third at age 30, and the final third at age 35. Depending on your children’s level of financial maturity, you can work with your estate planning attorney to set up the inheritance distributions based on your wishes and what you believe would be best for your children.
Education and Skills: Invest in yourself. This could mean pursuing higher education or learning new skills to increase your earning potential. Read as much as you can and look for opportunities to increase your income, like pursuing job promotions or starting a side hustle that is related to one of your talents or passions.
Engage in Family Financial Discussions: Include your partner in financial discussions and decisions, ensuring you both are aligned with your goals. As your children grow, teach them about finances to instill good habits early on.
Remember that the earlier you start saving and investing, the more time your money has to grow. The power of compound interest is particularly compelling when you start in your 30’s. Building wealth is a long-term process and involves regular saving and investing through all kinds of up and down markets. You may consider working with a financial advisor to develop a holistic financial planning and investing strategy towards achieving your specific objectives.
“What are the advantages for an investor in their 30’s with a family?”
1. Financial Maturity: You've likely learned from financial mistakes in your 20’s, making you better equipped to navigate investment decisions going forward.
2. Higher Earning Potential: Your 30’s often come with career advancements, leading to an increase in income. If you can avoid the trap of lifestyle inflation, this provides you more capital to invest that may grow and compound over time.
3. Balancing Risk: With a family to consider, you might become more risk-averse in your investment strategies, particularly with some of your money allocated towards shorter term goals. This can lead to more stable, albeit sometimes slower, wealth growth.
4. Goal-Oriented Investing: With clear objectives, like savings for a children's education or purchasing a new home, your investment decisions can be more targeted and purposeful.
Remember, your 30’s are a pivotal time in your financial journey. With increased responsibilities come greater opportunities to shape your future. Stay disciplined, informed, and proactive in your approach. Consider consulting with a financial advisor to tailor strategies to your unique situation.
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About OpenAI’s ChatGPT tool:
GPT (short for "Generative Pre-training Transformer") is a type of language model developed by OpenAI that is trained to generate human-like text. ChatGPT is specifically designed for generating text in a conversational style. It is a machine learning model and has been trained on large datasets of real-world conversations in order to learn the patterns and styles of human communication.
Joe O'Boyle is the founder and principal of O'Boyle Wealth Management, a full service financial planning and investment management firm, located in Beverly Hills, California. Joe O’Boyle was named to InvestmentNews 40 under 40 class of 2016, and has a catalog of financial planning and investing articles on Money.com & U.S. News. Disclosure information.