How Should You be Investing in Your 30's?
Let's paint a picture. You're in your thirties, you got a lot of life coming at you. Maybe you just got promoted at work. Maybe you're thinking about getting married. Maybe you're looking at buying a house or you're saving for a new car. You've got a lot of things happening. And investing, you know, you need to start investing! How do you do it? Well, obviously you need to invest differently than your parents. So if that's where you're getting your investing advice, stop it! Seriously though. Where do you start? On the blog today we're going to outline the first 3 steps you need to take when setting yourself up to invest for the future.
1.) The Company Retirement Plan
Well, first things first - your company retirement plan. If you're working somewhere that offers a company retirement plan, that's always the first place to look. And the reason it's the first place to look is because most of the time, those plans offer a company match. A company match is free money. The company says, "Hey, if you participate in the plan and you put in X we'll match that we'll give you a certain portion of money to go into the account for your future, for free". Now company matches vary by company. Sometimes it's dollar for dollar. Sometimes it's 50 cents For every dollar that you put in. They might match the first 3% of your contribution or maybe they will match the first 6%. The first thing that you need to do is find out what the company match is. You can find that in your benefits paperwork, if you don't have your benefits paperwork, you'd probably find it on your company plan website. If you can't find it on the website, ask your HR person, somebody there will know. They'll be able to guide you on what the match is. Make sure that you're taking advantage of the match, whatever the match is put in at least enough money to take full advantage of it. Otherwise you're literally just giving away free money. The next question is: when you put money into the plan, where do you put it? On most plans now it's becoming more popular to offer a Roth option.
If your company plan offers a Roth option, it's normally a good idea to look at utilizing it. If you're in your thirties, your income is probably lower than what it's likely to be when you're in your forties and in your fifties. Because of that you may be in a lower tax rate now than you will be in the future. As a result you would be getting limited benefit from deducting the contributions on the traditional side of things. That makes it an ideal time to put that money away post tax using a Roth option instead of pretax using the Traditional option. If they don't have a Roth option, that's okay you should still contribute into the account, just use the normal pre-tax option. You'll get a deduction for contributing today, and you're still saving for the future which is the important part.
2.) How to Invest: The Story of Bob and Joe
So let's talk about the next step. How do you invest that money that goes in? Well, to start, we're talking about retirement money here, and if you're in your thirties, retirement is probably 30 plus years away. So it's okay to invest that money pretty aggressively. Pretty aggressively doesn't mean go to the casino and put it all on black. Pretty aggressively means making sure that you're balanced and diversified, but it's okay to have a lot of stock exposure when you're young and you've got a long timeframe. Historically speaking, the more growth-oriented your investments are the greater the return you'll have over a long period of time. The greater return you have, the more money you'll have when you get to retirement.
Let's tell a story. Let's talk about Bob and Joe. Bob and Joe both start at the same company at the same time. They're 35 years old. They each decide to put away $10,000 a year in their retirement accounts. They work for the same company for 30 years, and then they retire at 65. I understand that almost no one works for the same company for 30 years and retires at 65, but it's my story, and I'll tell it how I want. So here they are, now age 65 and they're retiring. Bob invested in a moderate risk tolerance for all of those years. He earned on average 6.5% per year. After all those years Bob is now sitting on $921,000 in his 401(k). Bob's very excited about this. He feels really good about retirement. He feels so good about it, that he decides he's going to brag. He's going to go brag to Joe about how great his retirement is going to be because of all of the money that he's got.
Here's the thing Joe invested more aggressively. He didn't invest in a moderate risk tolerance. He used something more aggressive. And over the years, he ended up averaging 8% instead of 6.5. That might not sound like much of a difference, but it really matters over such a long period of time. Over 30 years, Joe's not sitting on $900,000 like Bob, Joe has $1,240,000. Now all of a sudden Bob doesn't feel so good. Joe feels pretty happy with himself. Off they go into retirement. There are two things that we learned from this story. One don't brag about your money. Nobody likes it. Oftentimes it doesn't work out very well. Two: invest like Joe don't invest like Bob. If you've got a long timeframe, it's okay to be a little bit more aggressive, understand what the risks are, but understand that if you're a little more aggressive with long-term money, it can really benefit you in the long term.
3.) Save Your Savings
Step number three, save your savings. What I mean here is don't invest everything you have. You should have a savings account. You should have money put away for emergencies. Also use your savings for money that you've earmarked for future large expenses like buying a car or down payment for a house. You want to make sure that that money is there when you want to use it. There is nothing worse than investing your savings money for the future down payment of the house, and then a few months before you're going to buy that house the market crashes. All of a sudden, no new house. You don't want that to happen. I know that money in savings doesn't really earn very much. That's okay. Separate it out from your investments. Save your savings, invest your other funds.
That's all there is to it
It's really quite simple. Remember the 3 tips: Look at the company retirement plan, make sure you're taking full advantage of that. Two invest appropriately for the timeframe that you've got. And three, make sure that you keep your money that needs to stay liquid and available in an appropriate vehicle like a savings account. Follow those three steps and you'll be well on your way to a bright financial future. If you've got questions, or if you're looking for help with this type of thing, by all means drop me a line. I'm happy to help!