Five tips for the 30-something's financial plan

Saving for your children’s education

For many people, it’s likely that they had a child in their 30’s. It’s also likely that this child will eventually finish high school and go to college. And it’s 100% likely that this college education will be more expensive than it is today. In order to have your child graduate college with the least amount of college debt, you should start saving now. 

Utilizing the power of compound interest (as mentioned in the 20-Something article), you should consider saving regularly to a 529 education account. Considering that college tuition is increasing at approximately 7% a year, it’s important to save as much as possible for this expense. One problem that some parents encounter is how to split their savings between college and retirement. There’s a simple way to answer this question: “You can get a loan for college, but nobody’s giving out loans for retirement”. Take care of saving for yourself, and then for your child’s education expenses. 

Having enough life insurance

How would your dependents survive if you died today? Would your partner have to work two jobs to keep food on the table? Who would pay for your child’s education? Make sure you have enough life insurance to meet these demands. 

How much is enough? One rule of thumb is ten times your income, but that may not apply to everyone. If you want your child to go to an Ivy League school or you don’t want your partner to work again should you die, you will have to consider a larger policy. 

You’ll never be able to calculate the need down to the last dollar, but you should be able to estimate if you have enough insurance. If you do not know if you have enough, there are life insurance calculators available online. If, like me, you are risk adverse, you may want to opt for higher coverage. With level term insurance rates being very affordable for those of a younger age, it may make sense to buy a larger amount of insurance while you can.  

Ramping up retirement savings

If you were taking care of your debt load and saving for an emergency fund in your 20’s, now is the time to start seriously saving for retirement. Now that you have a solid foundation for your financial picture, you can start saving for the life you want to have. But how much should you save and where?

 Firstly, take advantage of any employer matches and incentives to save into company plans. Secondly, if your income and cash-flow allows, pay taxes on your income and utilize tax-free vehicles such as a Roth IRA. While you are young, it is assumed your tax rate is lower than it will be later in life. It is best to pay taxes at this lower rate so you can enjoy the contribution and its earnings on a tax-free basis in retirement. But how much should you put in? There are numerous websites that will run calculations based on how much you want to live on in retirement. They will take into consideration average historic investment returns and provide you with an annual or monthly amount. This number may be high or low depending on the estimate you have entered, but don’t let that put you off saving money today. 

Having a diversified portfolio

If you have been investing since your 20’s, it may be time to start paying close attention to how your portfolio is invested. While it is recommended to save monthly into retirement accounts, it is also important to consider how market movements and balance increases can cause your account allocation to change from the way you had originally intended. Using some investing tools found on financial planning websites, you should be able to determine what type of portfolio is ideal for your age, goals and risk tolerance. Making sure your account stays aligned to this allocation at least twice a year should help to maintain your investments as you intended. As you move closer toward retirement you will want to review your accounts more often such as every quarter. 

Maintaining manageable real estate debt

It is many American’s dream to purchase a house with a white picket fence and live happily ever after. While these houses are out there, whether they fit into your budget is another thing.

 The typical debt-to-income ratio used by mortgage professionals is to maintain a payment not more than 33% of your gross income which includes your mortgage, insurance and taxes. However, to make more room for some of your other goals and not be “house-poor”, I would suggest having a mortgage that is not more than 25% of your net income (take-home pay). Whether you put this on a 15 or 30-year fixed mortgage is up to you, but most advisors would suggest that you only take out a 15-year mortgage to reduce the amount of interest you’ll pay. While this may be the ideal situation, some housing markets may require the use of a 30-year mortgage to allow you to have a house that you and your family can live in. Whatever your situation, just make sure you have margin in your budget for the maintenance requirements so you can continue to save and still have funds for other things.  

As you are in your 30’s, it is hoped that you have built a foundation for your financial future. Ideally, your debt level is low, you have some money in savings, and you’re starting to save for long term goals. If you’re not there yet and are still working on the foundation, don’t worry, there’s still time. Remember, having money by itself is not the goal; having the discipline to consider money as a tool to help you enjoy life is.

 Over 30 but under 50 - click here for some tips for the 40-something.