Here's a challenge for you. Go find someone in their 60's and ask them what they wished they would have done in their younger years. Though they will no doubt give varying answers, many will likely bring up items related to personal finance, things they wish they would have done (e.g. saving more). This is for good reason too.
You see, personal finance is interesting in that just very small actions today create a butterfly effect, sometimes extremely large butterfly effects. Unfortunately many, maybe even most, people ignore too many of the things they should be doing until it's far too late in the game.
So with that being said, here are a handful of items that the majority of people in their 30's, especially parents, should be doing ... along with what they shouldn't be doing*.
*Every situation is unique. There are exceptions to the rules/suggestions outlined below. Consider your own personal situation, including talking to a financial planner, before taking action.
Be consistently generous.
Being generous is good for everyone. It makes the giver happier. It obviously helps the recipient. Don't let this topic become a nice-to-do but instead a primary part of your financial picture. Doing so will likely have a dramatic impact on your mental well-being.
Did you know that generosity and gratitude are positively correlated? That's right, the more we give the more thankful we are for that which we have or get. We can all teach our kids gratitude by teaching them generosity and kids learn better by watching their parent's actions than listening to their parent's words.
Don't Do This
Ignore giving altogether. Even if you aren't able to give financially, you no doubt have skills, time, and effort that you could put forth. Volunteer at church, pack food at a Feed My Starving Children facility, go be a guest reader at a kindergarten class, just go do something for someone else. Your kids are watching and learning from you, be cognizant of that.
2.) Life insurance
Buy 15-20 year term insurance
How much? Higher of:
((Annual household take home pay X 1.15) + $6,850) *5
*How to figure out net pay: If you get paid biweekly, multiply your take home amount by 26; if you get paid bi-monthly, multiply by 24; if your income is variable then use 70% of your AGI from your tax return of the prior year.
**If you have other, very specific goals, such as funding kids' college, you should add that amount to the above. Reasonable people can disagree on the exact amount necessary. It's more important that you have it versus how much exactly.
Don't Do This
Overbuy or buy the wrong type.
Sure, it'll be nice for your beneficiaries if you pass on $2m should you unfortunately die next week. What if, though, they only need $500,000? It'll be nice for them to have the extra amount but that doesn't really justify buying $2m of coverage. Remember, it's far more likely that you don't actually use the policy than do use it. As such, be efficient with your cash-flow and only buy the right amount of dollar coverage for the right amount of years. If you are highly disciplined over the next 15-20 years you shouldn't have much of a need for life insurance.
Be consistently aggressive
When accounting for age only you should probably be invested somewhere between 75% and 100% in stocks. Pay attention to risk though.
What does it mean to pay attention to risk? In particular, consider:
- Risk tolerance
Will you be able to stick with your investments when tough market conditions hit? The worst ever bear market was a top-to-bottom loss of roughly 83%. If you have $100,000 today and see losses that cause you to have $17,000 a year later, will you be able stay invested? Maybe you will be able to; will you want to? This is the idea of risk tolerance.
- Need for risk
Maybe you have extremely ambitious goals that require a high amount of risk (which usually is accompanied by expectations of high growth) or maybe the opposite is true, you have an extremely high savings rate which allows for a lower risk level. There are plenty of 30 year olds out there who can afford to be less aggressive than the general rule of thumb.
- Ability to incur risk
Generally speaking, the worse your total financial picture is, the less risk you really should be taking. It'd be terrible to have a perfect storm, for example, of having the following occur at the same time: you get laid off, you have a big 401(k) loan, a huge auto loan, 5-digit credit card balances, all the while seeing losses of 40%+ on the asset side of your balance sheet. On the flip side of the coin, if you have close to no debt and strong confidence in your job security then you have high ability to incur risk.
Don't Do This
Get completely in and completely out of the stock market based off of:
- Gut feeling
- Who's politically in power
- 3rd hand information (you heard a tip that came from your neighbor's cousin's mechanic who goes to church with a guy who knows a lot about money)
Tell your money what to do, use cash where/when possible, sit down with your spouse, if applicable, and write down your spending goals every month. Do these things and it will be difficult to fail financially.
Don't Do This
Keep up with the Joneses
Keeping up with that mythical family has been the downfall of many well-intentioned people. Doing this is a form of herd mentality and avoiding it is much easier said than done. If and/or when your income increases do your best to increase your savings rate too, instead of spending the whole thing.
1.) Have a match at work? Save at it, in the Roth option if allowed.
2.) Save in a Roth IRA*.
3.) Have an HSA? Max it out, try not to use it, invest the balance.
Doing these things at an aggregate savings rate of 15%+ will set you up for a sweet, tax-efficient retirement. Check out the Retirement+ page to learn more.
*This isn't true for every single person in their 30's but it's true for most, especially given the new tax rates and rules.
Don't Do This
1.) Save too little for retirement so that you can:
- Buy a boat
- Fund kids' college education accounts
- Go on a lavish vacation, etc.
Saving for retirement is effectively saving for 25+ years of unemployment, it's not a nice-to-do but a must-do.
2.) Save or invest in
- An annuity
- Loaded mutual funds
1.) Eliminate, and never again incur, credit card debt
2.) Buy a vehicle based off of what you actually need vs how much monthly payment you can afford
If you must finance a vehicle you should write down your must-have's before looking and then find the best price/value for those features.
Don't Do This
Incur debt for:
- Eating out
Follow these directions and your future self will likely thank you.
Most people have goals for a fun retirement, but many don’t have a plan to achieve them. Whether you’ve been saving towards retirement or wish you could, it’s time to define what retirement could look like for you.
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