How to Manage Your Money in Your 20s, 30s and 40s
LearnVest Founder and CEO and Entrepreneur in Residence Alexa von Tobel talks personal finance—for every stage of life.
From Alexa: When it comes to managing your money, there are certain rules to live by no matter what your age or life status might be. Things like having zero credit card debt, building an emergency fund and saving for retirement are always going to be critical components of a solid financial foundation. That said, there are certain items worth zeroing in on and additional goals to consider depending on whether you’re in your 20s, 30s or 40s. Let’s break down some of the best money goals and management tips by decade.
If you’re in your 20s….
Know your numbers
Before you can truly tackle any financial to dos, you need to know what you’re starting with. First things first, check your credit score (CreditKarma.com is a wonderful, free resource to do this). Then, calculate your total net worth—tally up your assets in all of your bank accounts, savings accounts, investment vehicles and subtract any debts you might have (i.e., student loans or credit card debt). And finally, make sure you understand exactly how much you make each month after-taxes and how much money you’re shelling out across all of your various expenses.
Lay the groundwork
Twentysomethings have two powerful things working in their favor: 1. They tend to have fewer responsibilities and 2. They have time on their side. This puts them in the absolute best position to lay the groundwork for a solid financial future. It means the following: start to put money into an emergency savings fund (ideally at least three months’ worth of take-home pay), contribute to a retirement account (if your employer offers a match, try to contribute enough to maximize it), and focus on paying off any credit card debt.
Even if you’re dealing with student loans and already feel strapped for cash, I promise (!) it will only get harder to save as life gets increasingly more complicated. So, start small—putting $20 in a retirement account each month is better than nothing—because by building savings muscles today, you’ll be in a much better position to continue this behavior later on. And, as I always like to say, compounding interest is math, not magic. Money you contribute to your retirement account today can do far more than what you contribute 10 years from now. So, get moving!
If you’re in your 30s….
A recent study with LearnVest clients showed that financial confidence takes a dip when you’re in your thirties (it actually decreases by decade). To help make sure you continue to feel optimistic about your financial future, there are a few things to keep in miA recent study with LearnVest clients showed that financial confidence takes a dip when you’re in your thirties (it actually decreases by decade). To help make sure you continue to feel optimistic about your financial future, there are a few things to keep in mind:
Solidify your foundation
The same facets of financial security apply when you’re in your thirties, except now you need to be even more laser-focused on achieving these goals. It might be especially trying as there is more on your plate (a home, babies, a spouse, parents to care for, etc.), so continuing to build your emergency savings is crucial. Now, especially if you have a higher paying job or more people dependent on your salary, you’ll need a bigger pool of money stashed aside in case of an emergency (nine to 12 months’ worth of take home pay). Also, your retirement account must be top of mind. By age 35, I encourage people to contribute at least 15% of their salary to retirement. Impossible? Then set smaller goals for yourself. Aim to increase your contributions by 1% every six months (and set calendar reminders to make sure you actually do it!). Finally, aim to always have zero credit card debt.
Plan for new life goals
As you enter your thirties, home-buying and children are two major goals likely on your radar (keep in mind that it costs more than $245,000 to raise a child in the US according to the US Department of Agriculture). When it comes to home buying, you ideally want to have 20% of the cost ready for a down payment, but it requires more than just that to be financially prepared (think: closing costs, additional costs associated with maintenance and repairs, etc.). Like any major goal, actively consider how much it will really cost you and put funds away each month directly for this endeavor (aka, do not tap into your emergency fund for this). Whatever your additional goals might be, have separate savings accounts for each in order to stay organized and help track your progress.
Consider additional responsibilities
If you haven’t already done so, think about putting together your last will and testament (a legal document that dictates what happens to your possessions after you pass) and a living will (a health care directive). You might also want to consider purchasing life insurance, which is essential to ensure that your family is financially secure in case something bad or unexpected happens.
If you’re in your 40s….
(Continue to) focus on your foundation
Again, you are likely juggling more than ever before as you hit your 40s, but a solid financial foundation is just as crucial—if not more so. Aim to have zero credit card debt and a solid emergency fund (in the event you are unemployed, on medical leave, etc.). You are also closer to retiring, so try to contribute at least 20% of your salary to retirement. Remember, even if you’re focused on funding your child’s 529 plan (we’ll get there), prioritize funding your retirement.
Prepare for your child’s future
This is a very common goal for folks in their 40s. Though every family handles this differently, if you are considering helping fund your child’s future education, I recommend a 529 plan as the college savings vehicle to help you do so since they are both more flexible and and have added tax benefits compared to other options. I opened one up as soon as my daughter was born last year.
Prepare for your parents’ future
Another biggie. Depending on your family’s situation, your parents’ retirement and/or care is something you might need to handle along with your other financial responsibilities. Regardless of your personal situation, make sure you are communicating with your parents to understand the realities they face. Are they on track for retirement? Do they have a will and/or beneficiary? Who else in your family (you, your siblings, etc.) has access to their financial accounts and/or information? Ensuring an open dialogue will prevent you from running into blind spots.
For more advice from Alexa, read her recent columns on personal finance, or visit her online at LearnVest.com. LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company.