The choices you make early in your career can help or hurt your ability to retire when you want. Here is my list of the “Top 5 Things” you should do before turning 30. Doing these while in your 20s will help position you for financial success later on in life:
Control Your Debt… Don’t Let It Control You
Student loans, car loans, and credit card debt are all pretty common when starting out. As you approach 30, I recommend two things regarding debt. First, stick to a payment schedule. This means consistently paying down these balances each month. For instance, if you are age 24 and want your $15,000 student loan to be paid off by age 35, this means you would need to pay $152 monthly for the next 11 years (assuming a 5.5% interest rate). Second, as you pay down these balances, avoid racking up new debt. It will only impede your payoff progress. I encourage you to pick a date by which you would like your debt to be paid off and work backward from that, by figuring out how much you have to pay-per-month and sticking to it.
Know Your Budget
Start thinking about how much you spend every month. First, calculate your fixed expenses. This includes things like mortgage/rent, cable/internet, car payment, and car insurance — expenses that do not fluctuate much month-to-month. Next, calculate your variable expenses. These will fluctuate each month, such as groceries, gas, and entertainment. Now, compare your expenses with your income. Are you spending too much? Where could you cut back if need be? You will begin to identify your needs versus your wants. Knowing your spending habits will make you more aware of your financial capabilities.
Save, Save, Save!
As you start to understand your budget, start saving money. If what you are spending each month eats up most of your monthly income, look for ways to cut back. Start by putting money towards an emergency, or “rainy day,” fund. For most, this should be 4-6 months of expenses to accommodate any unexpected, prolonged loss of income. Then, start saving toward specific goals. For instance, do you want to own a home? If so, calculate what you will need for a down payment and start saving toward it. It is critical to have a good savings discipline, but it helps to know your end-goal.
Don’t Just Work For Your Money — Have Your Money Work For You
Once your basic savings are adequate, invest any excess income. This could mean enrolling in your 401(k), or increasing your contribution amount if you already participate. Your company retirement plan (if offered) allows you to save aggressively toward retirement and potentially lower your taxes as well.
If you already contribute a healthy amount into your company retirement plan, contribute to a Roth IRA or brokerage account. This will help diversify your investments by not having all your wealth under one roof, which is most likely your 401(k). If you invest on your own, consider a strategy that satisfies your risk versus return appetite. Your plan should also address what you need to earn each year to accomplish your future needs and goals.
Your budget and investment capabilities will evolve. Revisit your spending habits and savings capabilities periodically as you earn more, if you take on new debt (i.e. home mortgage) or as your financial responsibilities simply increase (i.e. having children).
Never Too Early To Start Looking Ahead Toward Retirement
Envision your ideal retirement. Here are some things to keep in mind when projecting retirement:
Age: Retire at 55? 60? 65?
Lifestyle: Do you want to travel? Buy a vacation home? Play lots of golf?
Monthly Cash Flow: Assess how much monthly income you will need/want to cover expenses
Conceptualizing something that is 20-30 years away can be challenging but very productive. Visualizing your retirement goals helps bring clarity to what you need to do to achieve them. If you need help working through these items, work with a qualified financial professional to help create the right financial plan that will guide you.
As your life progresses, your financial health should be prioritized correctly. Whether you are just graduating college, or about to turn 30, all young professionals should accomplish these five things sooner than later.
If you seek in-depth financial planning or simply have questions, please do not hesitate to reach out.
Joshua J. Baird
Investment Adviser Representative