What should I be doing?
Where do I start?
How do I tackle financial planning?
We often hear questions like these from clients in their 20s and 30s. As the world has become more connected, it has also become more complex when it comes to financial planning. It’s easy to feel overwhelmed and intimidated by all the options that exist and the sometimes contradictory advice you find online. How do you make sense of it all? By making a well-thought-out plan for the stage of life you’re in. In this blog post, we’ll look at two financial steps we believe to be critical for people in their 20s and 30s, as well as the major difference for those approaching retirement.
Why You Need An Emergency Savings Fund
For most people, it’s advisable to have 3-6 months of living expenses saved. This provides a cushion for you in the case of a job loss, medical issues, major car or house repairs, and more. If you have a more variable income due to being self-employed or in a commission-based job, it may be advantageous to expand that savings fund to 6-12 months of expenses.
Your life circumstances influence how much is wise to have set aside. With a spouse or kids, you’ve got more dependents. If you bought a home, you have more expenses to cover. Young, single people likely won’t need as much set aside but as your life stage changes, so too should the amount of money in your emergency savings account.
It’s also important to remember that because these are emergency savings, they should be easily accessible. Savings accounts or short-term CDs give you the flexibility to access the money within days should an emergency hit.
The Benefits of Maxing Out Retirement Accounts and Building Taxable Savings
Next, we recommend maximizing your retirement savings and building taxable savings.
In your 20s and 30s and 40s, take advantage of workplace retirement plans, especially if there’s an employer match. Contribute as much as (or as close to) the amount your employer will match to get the most out of the plan. Some people also contribute to an IRA, providing diversification to their portfolio. IRAs stay with you no matter where you work and your contributions grow tax-deferred, meaning you don’t pay taxes on investment gains each year. This helps your savings grow faster in the long run.
A crucial strategy in building your retirement accounts is to increase your contributions as your income increases. A common mistake we often see is when people forget to regularly keep up with their accounts and consider how much they’re contributing, especially when their take-home pay grows.
A Key Difference For Those Approaching Retirement
The biggest difference between the early years of your career and the last decade as you approach retirement? Cashflow planning. It’s advisable to begin estimating your anticipated monthly expenses in retirement. Consider costs like healthcare, housing, food, transportation, and travel.
Many people also review their estimated monthly social security benefits at full retirement age and calculate the savings and investments they’ll need in order to generate the additional monthly income needed in order to live the retirement lifestyle they want to live. Your planning should fit your needs, which are unique to you, your life, and your family. This is why many people recruit the help of experienced financial planners to help them make sure they have a sound plan and effective strategy for their retirement needs.
Start Saving Early and Let Compound Interest Work For You
The bottom line is if you’re in your 20s or 30s, it’s time to partner with the power of compound interest. By building your savings, retirement accounts, and taxable accounts early, time is on your side. Here’s a basic example to show you how your money grows faster over time with compound interest.
John invests $1,000 at an annual interest rate of 5% and contributes $50 each month. In one year, he earns $50, bringing his account total to $1,650. In two years, his account grows to $2,332.50. Over time, the interest that gets added to your principal balance allows your money to grow exponentially faster compared to simple interest alone. After 30 years, John’s $1,000 grows to over $44,000 (and this assumes he keeps his monthly contributions at $50 and never increases them). This is a simplified example of how when you let compound interest do its thing, your nest egg will grow when you need it!
The worst thing to do early in your career? Nothing. Reach out to our team today if you’d like a trusted partner to help you navigate the complexities of financial planning for the long game.