Your 30s are a great time to take control of your finances. No longer are you fresh out of college, weighed down by a mountain of student debt while stunted by an entry-level salary. Furthermore, because you're probably not paying for your kids to go to college just yet, you're in a strong position to not only save money, but put that money to work for the future. If you're in your 30s, here are four moves to make this year.
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1. Build your retirement savings
Retirement is most likely going to be more expensive than you anticipate, so take advantage of the fact that time is on your side. Thanks to the beauty of compounding, the earlier you start saving for retirement, the more opportunity your money gets to grow. Holding off on retirement savings till your 40s or 50s, on the other hand, could cause you to come up short down the line.
The following table shows how much you'd stand to accumulate by saving $500 a month starting at different ages.
Calculations by author.
Notice the difference between kicking off your savings efforts at 35 versus doing so 10 years later. Though you'd only be putting aside $60,000 less by starting at 45 instead of 35, your ending balance will actually be $321,000 lower because you'll lose out on all that growth. And if you wait until your 50s to start saving, you'll have even less money available in retirement.
Another thing to note about these calculations is that they assume an average annual 7% return. If you're wondering whether that's realistic, you should know that it's actually a couple of points below the stock market's historical average. And that's another benefit of saving in your 30s -- with retirement so far off, you have time to get a bit aggressive, invest heavily in stocks, and ride out the market's ups and downs.
2. Get a mortgage
Homeownership isn't right for everyone, but if your goal is buy your own property and you've saved enough for a down payment of 20% or more, now might be the best time to apply for that mortgage. First of all, if you've been working for a decade or longer, you've had time to build up a decent credit history, which means you're more likely to get approved at a favorable rate. But just as importantly, if you take out a 30-year mortgage in your 30s, you'll have a good opportunity to pay it off in time for retirement. And that's important, because once you stop working, you'll move over to a fixed income, at which point lowering your expenses becomes crucial. Entering retirement mortgage-free can help stretch your budget at a time when you're at your most financially vulnerable, and if you start making those payments today, you stand a strong chance of meeting that goal.
3. Pay off high-interest debt
ValuePenguin reports that 35- to 44-year-olds have the second-highest level of credit card debt in the country, with an average outstanding balance of $8,235. And while the good kind of debt, like mortgage debt, can actually help boost your credit score, bad debt, like credit card debt, can wind up wrecking it if you're not careful. Not only that, but the longer you carry a credit card balance, the more money you'll end up throwing away on interest charges.
Imagine you owe $8,235 on a credit card with a 20% interest rate. If it takes you three years to pay off that balance, you'll wind up spending almost $2,800 on interest alone. And that's not money you want to be throwing away, because if you were to take that sum, invest it, and generate an average annual 7% return, you'd grow it into $21,000 over 30 years.
4. Start a college savings account
The good thing about saving for retirement in your 30s is that you have roughly three decades for your money to grow. Your college savings window, however, is far more narrow, especially if you don't start putting money away the minute your first child is born. That's why it's important to focus on college once your retirement savings efforts are well under way -- the more cash you sock away now, the more time you'll have to take advantage of compounding.
There are several avenues you might pursue when saving for college. A traditional savings account is guaranteed to leave your principal intact, but because you'll be lucky to get 1% interest, it's not an efficient way to grow your balance. A better bet is to open a 529 plan, which will allow your money to grow tax-free. Furthermore, your money won't be taxed upon withdrawal as long as it's used for qualified higher education purposes. While there's a degree of investment risk with a 529, you might score an average annual 6% return, which will get you closer to your savings goal than a standard savings account.
Just how much will that higher return pay off? Well, if you save $300 a month for 10 years at an average annual 1% return, you'll have about $37,600 after a decade. But if you manage to snag an average annual 6% return, you'll have roughly $47,400 instead -- an almost $10,000 difference. Plus, with a savings account, you'll be taxed on your interest income along the way, whereas your 529 balance will be available tax-free as long as you use it for eligible expenses.
It's tempting to spend much of your 30s not worrying about the future and enjoying the present. But if you're not careful, you might come to regret that decision down the line. All it takes is a few smart money moves now to set yourself up for success.
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